Economics as a moral science

by Ingrid Robeyns on October 31, 2013

For a while I have been working on a paper on democracy, expert knowledge, and economics as a moral science. [The financial crisis plays a role in the motivation of the paper, but the arguments I’m advancing turn out to be only contingently related to the crisis]. One thing I argue is that, given its direct and indirect influence on policy making and for reasons of democratic accountability, economics should become much more aware of the values it (implicitly or explicitly) endorses. Those values are embedded in some of the basis concepts used but also in some of the assumptions in the theory-building.

The textbook example in the philosophy of economics literature to illustrate the insufficiently acknowledged value-ladenness of economics is the notion of Pareto efficiency, also known as ‘the Pareto criterion’. Yet time and time again (for me most recently two days ago at a seminar in Oxford) I encounter economists (scholars or students) who fail to see why endorsing Pareto efficiency is not value-neutral, or why there are good reasons why one would not endorse the Pareto-criterion. Here’s an example in print of a very influential economist: Gregory Mankiw.
In his infamous paper ‘Defending the One Percent’ Mankiw writes (p. 22):

“Discussion of inequality necessarily involves our social and political values, but if inequality also entails inefficiency, those normative judgements are more easily agreed upon. The Pareto-criterion is the clearest case: if we can make some people better off without making anyone worse off, who could possibly object?”

Yet the Pareto-criterion is not as uncontroversial as Mankiw believes. The Pareto-criterion compares two social states, A and B, and makes a claim about whether the act/policy/social change that brings us from A to B is desirable or not. If in B all individuals have at least the same welfare/utility/wellbeing than in A, and at least one of them has a higher level, then moving from A to B is a Pareto-improvement, and the Pareto-criterion recommends the move from A to B on grounds of efficiency.

As many have argued, the Pareto-criterion remains agnostic about the fairness or legitimacy of A as the starting point. The Pareto-criterion also doesn’t attach any importance to distributive issues in either A or B. If those who are living in misery stay equally miserable, but due to some policy or social change the ultra-rich become even more rich, then Mankiw believes that we would all agree that this social change is a social improvement. Given that many citizens (and political philosophers) believe that certain types of inequality are intrinsically bad, I don’t think that we can draw Mankiw’s conclusion.

Moreover, even if we would take the Pareto-criterion as a criterion of efficiency understood as ‘no-waste’ (in the sense of: ‘let’s get a bigger pie if we can, independent of how the pie is distributed’), then the question still remains ‘efficiency of what’? It’s entirely plausible that an economic change that is Pareto-efficient in terms of desire-satisfaction is not Pareto-efficient in terms of a set of basic capabilities, or in terms of equivalised household income. So even if one doesn’t attach any value to distributional issues, our endorsement of the Pareto-criterion may be dependent on the “metric” in which it is expressed.

I’m using this example of the Pareto-criterion merely to support the claim that economists need to think more about the values embedded in their theories – a claim on which any philosophy of economics textbook can give us many more examples and more detail.

Why is it relevant now? In the lively discussion on what kind of science (or something else) economics is which is currently raging on the blogs, we should also consider the view of those who have argued that economics is a moral science. This, in Tony Atkinson’s words (2011. p. 157) means that “Economists need to be more explicit about the relation between the welfare criteria and the objectives of government, policymakers and individual citizens”. Atkinson traces the expression back to Keynes, who had written in a letter that ‘economics is essentially a moral science’. More recent defenders of that view include Kenneth Boulding in his 1968 AEA presidential address, who defended the strong view that economics inherently depends on the acceptance of some values, and thus inherently has an ethical component. And surely Amartya Sen should be listed here too (although I cannot recall having read in his work this precise expression). And also Robert and Virigina Shiller in a 2011 paper in the AER proceedings, who stress that Boulding is asserting that one must understand the ‘human condition’ in order to pursue economics as a moral science. If understanding ‘the human condition’ becomes part of economics, then that surely has implications for the status of inductive reasoning and other non-mainstream methods.

Much has been said in recent weeks about what (if anything) is wrong with contemporary mainstream economics, and what changes are needed. Over at New Apps, Eric Schliesser (post 1, post 2) also pointed to the importance of values in understanding what is wrong with contemporary economics. Schliesser provides a very thoughtful response to Raj Chetty’s piece that is well worth the time of anyone who thought Chetty was right (since, as Schliesser convincingly argues, that’s not the case).

My view is this: economics shouldn’t aspire to be a value-free science, but an intellectual enterprise that combines elements from the sciences with elements from ‘the arts’ done in a manner that makes it value-commitments explicit. Values in economics have many sources. There are values involved in the choice of questions that are asked (and not asked). Value judgements are embedded in the normative principles (such as the Pareto-criterion) that are endorsed. Value judgments flow from the choices in how basic categories and notions are conceptualized (is ‘labour’ only what we do for pay, or also what we do to reproduce the human species?). And value-judgements may be linked to methodological choices that the economist makes, since the methodologies can restrict what one can observe and understand (for example: if you only take into account those things that can be measured, then it follows that non-measurable entities will receive zero-weighs in any evaluation).

I advocate that in as far as economics is not value-free, the valueladenness should be made explicit and economists should be trained to detect the value commitments in their theorizing and conceptual work. My interactions with economists suggest that this is a skill many (most?) of them do not possess, so it is a change needed in the core economics curriculum. Presumably, we can’t turn all economists into scholars well-trained in normative analysis. But there are alternatives possible – for example, economists should collaborate or interact more with scholars trained in normative analysis (I’m thinking primarily of economic ethics, but not necessarily only them), to get professional advice on the value-commitments of their work.

By the way, if there must be a Nobel Prize in Economics, it would be a good idea to give it to Tony Atkinson next year. Not only does he deserve it for his pathbreaking work on inequality measures and other contributions to welfare economics since the 1970s, but it would also help to restore the position of welfare economics in the economics mainstream. Welfare economics could be considered one of the bridges between economics and moral philosophy (economic ethics and normative political philosophy on economics topics being two other such bridges), and therefore deserves and needs more support and attention.

Ingrid, I don’t have time to finish reading your post just now, but I’ve read the start of it up to the part about the Pareto principle.

On this, a year or so ago I looked through a book by Hussen (Ahmed (2000,2004 2nd Ed.) Principles of Environmental Economics Routledge, Cornwall, Great Britain) a lot of which was too complicated for my level of understanding, but in which he makes clear there is a definite conflict or ‘trade off’ between efficiency (which I gather is the thing to take away from the Pareto principle???) and intergenerational equity.

There is a figure (Figure 13: Hussen’s Curve of the Trade-Off Between Intergenerational Efficiency and Equity p. 270) that demonstrates this clearly – and concludes that thus not all efficient points are sustainable.

> It’s entirely plausible that an economic change that is Pareto-efficient in terms of desire-satisfaction is not Pareto-efficient in terms of a set of basic capabilities, or in terms of equivalised household income.

I don’t follow this, can you spell it out? You seem to be considering a change where _every_ single individual is either happy or indifferent to the proposed change, but there’s some other metric (I guess something no single individual thinks is important enough) under which the change is adverse – ? If that is the point, an example or pointer would be extremely helpful. I can sort of see how this might arise (some intricacies of group choice theory?) but would love an example.

> Indeed. For example, a model where the king owns everything and everyone one else owns nothing can be considered Pareto optimal.

Is anyone, including the worst of the worst economists, really claiming a Pareto optimum point is necessarily a _good_ situation? Isn’t the claim rather that, right or wrong, that something not Pareto-optimal is bad (because it is improvable, even if the point you reach by local improvements is still objectively awful.)

Adam Smith authored, The Theory of Moral Sentiments, and economists have been pushing their normative analyses ever since. I think you invite ridicule by suggesting that they don’t make them explicit already. Particularly on the Right, many think they have a strong foundation of values in the freedom to choose; it might be juvenile, but it could hardly be more explicit.

It is simply wrong to say that Pareto Efficiency ignores distributional issues. Making someone worse off to make someone else better off violates the Pareto criterion, and that’s distributional. What the Pareto criterion does do is privilege rentiers and the status quo ante, putting the endowments of the propertied and powerful off-limits. That’s profoundly conservative, as Vilfredo Pareto, a ripe bastard, well knew. In technical practice, there’s a tendency to devise purely subjunctive schemes of redistribution downward to justify policies, which will be, in execution, redistributive upward. In other words, right-wing economists, for example, will argue for free trade policies, which will hurt union workers, by positing generous schemes of compensation for those workers out of the gains from increased trade, which schemes, in practice, are not generous or even extant.

Economics is about social cooperation to achieve material gain from specialization and trade. Many libertarians like to fantasy about the basic fairness of balanced, horizontal bargains, but, in the real world, the most productive and problematic bargains are vertical, that is between a boss and workers, capital and labor. That relationship can be enormously productive and also can slide into the worst kind of authoritarian oppression and extraction. Pareto efficiency distracts us from really assessing that problem, that set of paradoxes. A group of people agreeing to cooperate by doing what they are told to do, handing open-ended power to a very few, can be enormously productive, but the power imbalance at the core of the relationship makes the fairness of the distribution of the fruits of that productivity a serious problem.

One can suppose, under conditions of complete and perfect information, that the conflict is easily and naturally resolved into paying each factor its marginal product. Under complete and perfect information, though, it is difficult to see what the point of telling people what to do, would be — they already know what to do: that’s what complete and perfect information implies. We live in a world of incomplete, asymmetric information and genuine uncertainty, where centralized planning and direction — power! — can have enormous economic yield, and where everyone bears risk, and risk is an inherent part of the incentive problem.

I would hope you can see the nature of this shell game. The pea is hidden up the hierarchy sleeve, while you are asked to guess under which market shell it is hidden.

The classic problem of income distribution comes down to whether to trust the boss to decide both what will be done and how much will be paid. Conservative economists often labor under the delusion that bosses, the rich and the powerful are rational and fair, while the lowly wage-earners are slackers and shirkers, without the skills or inherent value to earn a marginal product to justify a decent wage. It is just inconceivable that the boss wouldn’t choose a pareto-efficient outcome. A minimum wage, or a union wage, just stands in the way of that beneficent, rational, expert judgment.

We remain mired in the aftermath of a global financial crisis caused by rampant fraud, fraud, which many economists have enormous difficulty seeing. That’s the values problem in economics. They refuse to get serious about analyzing a world of genuine uncertainty and incomplete information, where lieing and cheating, not to mention the selfish exercise of power, are routine.

Nice post, Ingrid. I think you might get a smile out of “Equilibrium in the Jungle” by Ariel Rubinstein.

As you are probably aware, economists “like” Pareto efficiency because it punts on distributional concerns. 100:0 is Pareto efficient, and so is 50:50. Everyone would prefer 50:50; economists know that. But we choose a very low bar, Pareto efficiency, to avoid debates. We’ll even let 100:0 slide.

The implication is that if something is Pareto inefficient, at first glance it really must stink. You can make someone clearly better off. Now, to this:

It’s entirely plausible that an economic change that is Pareto-efficient in terms of desire-satisfaction is not Pareto-efficient in terms of a set of basic capabilities

There is a fascinating and under-appreciated result on this, care of Kaplow and Shavell (2001, JPE). Any non-utilitarian welfare function will create Pareto inefficiencies. (Although I have a bell ringing in my ears. Do I really mean “utilitarian” there? Correct me if I’m wrong on that.) My take on this — and again, this is not my area so correct me if I’m wrong — means that any “fairness”-related distribution (e.g. Rawlsianism, preferring labor wages to corporate income, etc.) will be Pareto inefficient.

I think here you appear to be missing Ingrid R’s point. Mankiw said who could object to making someone (say, an already ultra-rich person) better off if no one is made worse off? And Ingrid’s reply is that someone could object on the grounds that widening inequality might be intrinsically undesirable, even if the total pie is increased. In that sense Pareto-efficiency ignores the argument that inequality per se may be objectionable. That’s what she means here, as I read the OP, by saying P-E ignores distributional issues — the phrasing perhaps is not ideal, but the pt seems clear enough.

For a long, long time (i.e., since the early 1970s), I have argued that the alleged trade0ff between “efficiency” and “equity” is a was to dismiss equity as an objective. And that’s because “efficiency” has been used to mean something like “maximizing the value of production.” Which is a strange notion of efficiency. Suppose we decide that state Q in a society is the optimal state to achieve (please don’t ask me how we decide that). Then, I would agree that we should try to achieve Q efficiently–at as low a cost as possible–because doing so might actually allow us to achieve Q’, which we might realize is better than Q.

State Q might be a state in which the distribution of income (welfare, utility) (for example) is much more compressed than the current distribution of income (welfare, utility). Achieving that distribution of income (welfare, utility) at a higher, rather than lower, average *level* of income (welfare, utility) seems to me to be unambiguously a good thing (but I’m open to arguments that I’m wrong), even if in state U the level of average level income (welfare, utility) is higher than in Q–but less equally distributed. That is, if distributional equity and the average level of income are both good things, then we want to achieve our equity goals at as small a cost in (average) standard of living as possible. I call that efficient. But many of my fellow economists would not.

I think pareto efficiency can be fixed. The modification I would propose is that the utility function for each person(measured unit), also depends upon the distribution of economic goods, not just on direct physical goods. If I am going to be upset, that because of some change that makes a rich-and-famous person richer still, I will be disturbed when I compare my lifestyle to what I see on “the lifestyles of the rich and famous”, then my utility function must be changed to account for that negative. And face it, those on the wrong side of the distribution curve do feel psychological and social pain from comparisons to those on the lucky side.

Further to Bruce Wilder’s point: if someone has the ability to rape their workers with impunity, and values the ability to rape their workers with impunity, any reduction in worker-rape is pareto-inefficient: boss arsewipe has a sad ’cause he can’t rape no pretty young workers no more.

[the economic logic suggests strongly that there’s some pressure to fix pareto inefficiencies and — by definition — zero pressure to continue them: in a steady state, there shouldn’t be any pareto inefficiencies and any you think you’ve found must have some motivation akin to the above. So what use this tool is I’m not sure.]

In general I want to be sympathetic to the ideals in this article. But to my mind, “economics as a moral science” implies that “moral science” is a category of which we have other examples. I don’t know that we do. Do we?

That morality can be somehow viewed as a “science” is an incomprehensible idea to me.

That the chair of Harvard’s economics department wrote that god-awful paper is also incomprehensible to me. As you note, Mankiw offers this:

“The Pareto-criterion is the clearest case: if we can make some people better off without making anyone worse off, who could possibly object?”

Of course no one would object to this pie-in-the-sky example offered by Mankiw. But he’s stupidly ignoring the rather obvious fact that that a tiny fraction of our population is enormously better off, thanks to fraud, corruption, well-paid lobbyists, the Fed, TARP, Reaganomics and a host of other illicit reasons. And this increase in their well-being has come at an enormous cost to the rest of us.

As Bruce Wilder notes, economics is riddled with values. Ingrid does not agree with the particular values many of these economists espouse.

What is relevant now: economic theories are used to promote the most egregious fraud (“housing prices have never fallen; therefore it is impossible that they will ever fall; therefore let’s give a mortgage to anyone who breathes, whether or not that person can afford it.”) It’s for people like Mankiw – chair of Harvard’s economics department – to prop up this fraud by writing things like “Defending the One Percent.” Values-laden to the core.

The notion of economics being a ‘moral science’ is far older than Keynes.

In his <href="http://www.econlib.org/library/Mill/mlUQP5.html&quot; title=Essays on Some Unsettled Questions of Political Economy Mills defined economics as a moral science, in direct opposition to the physical sciences. (This is also, of course, the essay in which Mill comes to define political economy as “The science relating to the moral or psychological laws of the production and distribution of wealth.”)

The philosophical justifications for Mill’s ‘moral’ definition of political economy are too often ignored. Mill comes to this conclusion through serious reflection on the nature of ‘science.’ His conclusion was that either 1) economics is a moral science, or not a science at all. (One reason, amongst many, is the perennial charge that political economy could not perform a ‘crucial experiment’ in the Baconian mold.) All of this meant that “the science of Political Economy … [is] essentially an abstract science, and its method as the method à priori.” That is, it proceeded by philosophical reflection, not by referencing statistics, or performing experiments.

Mill continues “The conclusions of Political Economy, consequently, like those of geometry, are only true, as the common phrase is, in the abstract; that is, they are only true under certain suppositions, in which none but general causes—causes common to the whole class of cases under consideration—are taken into the account.”

It’s a remarkable essay, and very much under appreciated. Amongst it’s other virtues, I think that it is probably one of the most helpful points of demarcation between ‘political economy’ and ‘economics.’

P.S. Perhaps Keynes believed that his ‘economics’ was a moral science in Mill’s tradition (I plead ignorance). But I would argue he would then have completely missed Mill’s point. Many of the foundational moments in (what would become) economics took shape in direct and explicit opposition to Mill’s restrictive prohibitions on the tools (i.e., mathematics) and evidence (i.e., statistics) admissible in political economic discourse. Rather ironically, it was not Mill’s countrymen, but the ‘unscientific’ (or perhaps moral-scientific?) Austrians, who carried on his project, for better or for worse.

Anyway, apologies for the huge comment. The debate at hand is very interesting to watch from afar.

“My view is this: economics shouldn’t aspire to be a value-free science, but an intellectual enterprise that combines elements from the sciences with elements from ‘the arts’ done in a manner that makes it value-commitments explicit. “

Does NOT get rid of the thing, the idea, the measurement, the “science” that you do not like…

There will ALWAYS, even after all humans are dead, be an idea that is Econ, that doesn’t pay attention to your values.

What you seem to conflate is that if you get “more” people to think about the idea “econ” a new way, that changes the strength of the idea.

NEWSFLASH

You got it backwards – learn some memetics.

The IDEAS are the strong powerful thing, the SOFTWARE and our dumb brains, US, WE, are the RAM, the HARDWARE.

Your job isn’t to convince the hardware to use different software, your job is to FIGURE OUT and ACCEPT why the status quo software, that you don’t like, is the dominant OS for the boring old human hardware.

Your job is to take notes, and be impressed with what has gained dominance.

I believe that Kaplow and Shavell claim that any approach that gives principles of fairness weight independent of considerations of welfare will not be Pareto-optimal. I don’t find this result interesting, because it is tautologically true: whenever fairness and welfare assessments differ, it must be that advancing fairness reduces overall welfare.

Of course, this doesn’t mean that it is wrong to prefer fairness to greatest overall welfare. Kaplow and Shavell only interest me in cases where everyone (or nearly everyone) does worse off under fairness. Even in those cases, however, it is important to critically examine how people’s preferences (including a preference for fairness) are ascertained and modeled by a given “comprehensive” view of welfare, for reasons suggested by Robeyns above.

It seems to me that efficiency, being the relation of costs to benefits, is always about values, because the perception of a cost or a benefit is an evaluation. And, as most humans are moral beings, moral values are among the values they usually have to evaluate.

It seems to me that efficiency, being the relation of costs to benefits, is always about values, because the perception of a cost or a benefit is an evaluation. And, as most humans are moral beings, moral values are among the values they usually have to evaluate.

The concept of Pareto optimality is not a moral judgment. The decision to optimize Pareto optimality is a moral judgment.

There is an economic measure of inequality. It’s called the Gini coefficient. The decision to ignore effects on the Gini coefficient when making public policy is not an economic decision. It’s a moral and political decision.

When Mankiw argues that it’s good public policy o maximize Pareto efficiency even if doing so increases the Gini coefficient, he’s not acting like an economist, he’s acting like a moral philosopher (and not a very good one). But he doesn’t seem to understand the difference.

The way out of this problem is not to import liberal or left-wing moral philosophy into economics. It’s to scrub right-wing, libertarian moral philosophy out of t.

The real sting comes with “potential Pareto improvements”. As an illustration, suppose that low-paid workers in some industry benefit from a restriction that prevents them being displaced by machines. A standard argument (which I’ll assume valid for the purpose of illustration) shows that allowing the replacement would generate additional surplus large enough to compensate the workers, while still increasing profits and leaving consumers at least as well off as before.

The “potential Pareto improvement” idea is that we should approve the change, then leave it up to the tax-welfare system to undertake redistribution if it is considered appropriate. There are some pretty obvious problems with this, which I’ll leave to others to spell out.

Well said, Bloix. I think that what gets lost in mainstream discussions of inequality is the fact that wealth equals power. With great wealth comes the ability to sway public opinion, hire and fire, evict and house, pollute or conserve, lobby politicians, and all the other things we associate with power. I’m not (only) against inequality because I want nicer things; I want to participate meaningfully in our world. It’s that old critique about paying Wilt Chamberlin: it was all a fun show until he bought the country.

A question for the economists (a tribe to which I am about to make abundantly clear I do not belong):

A system consists only of Slavoj Zizek and Ayn Rand. It contains 10 bitcoins, distributed 5-5 between SZ and AR. The system may then change (we stipulate) in one of two ways. Either we introduce 10 new bitcoins into the system, split 5-5, or we introduce 20, and (of course) AR gets them all, whereupon she builds a gate across the gulch in which she lives and retires to publish unreadable tomes about how she deserves all the bitcoins. This second way is Pareto optimal, yes?

Now, here’s the piece I don’t know: AR getting all the new bitcoins greatly upsets SZ, who dashes off a 600 page book in a fortnight explaining how the bitcoins are the objet petit a serving as bar to the traversal of the fantasy, and are therefore both the cause of his unhappiness and something else equally Lacanian/Hegelian/Kiekegaardian/Leninistically tragic. Does SZ’s disquiet get to be included in the calculation of Pareto optimization, or is it confined to the realm of “there’s more money in the system and nobody’s worse off, so this is good”?

@6, who were the criminals who stole all the money? And why can’t we make a real recovery by simply confiscating the loot from the thieves?

It seems to me that the fraud theory is equivalent to “a buy cheap, sell dear” theory of profit, and no more correct.

As to the topic at hand, what efficiency is supposed to be maximized by Pareto optimality? If it’s efficiency in delivering well-being to the members of a society, it’s utter nonsense. Making the rich richer means changes in the well-being of the rest even in principle. The rich must be viewed as being able then to outbid the poor for scarce goods, whether it’s housing or political influence or servility from waiters and bellmen wanting tips.

Since their “consumer preferences” then affects capital investment, this criterion changes economic production. But there isn’t an argument of any sort at all I know of that even attempts to justify the new economy as more efficient, in any sense you may care to suggest.

As near as I can tell, a penny in sales taxes devoted to policeman’s wages and expenses in rousting vagrants sleeping under a bridge violates Pareto-efficiency! As economic analysis it is an operationally useless definition that simply assumes that no government policy can rightfully take away any property at all at any time. Which is nuts. Insisting it’s still good economics just makes me think economics is merely ideology. (And yes, here I mean that in the worst way.)

`Every human being has ideological, moral and political views. To pretend to have none and to be purely objective must necessarily be either self deception or a device to deceive others. Value judgements differ; economists have no superior capacity in making them. But just as there are some basic elements which set limits to the possible structures of languages so there is a core of common values in all moral codes’(Robinson, 1970. Freedom and Necessity)

Schliesser at New APPS adeptly nails the two main problems that prevent robust results in economics: “humans may change their behavior in light of their knowledge that they are subject to policy,” and, “methods are not capable of looking at the complex interaction of multiple policies at once.”

In other words, individual preferences are not natural, they are socially engineered; and we are dealing with an n-compartment system which will never allow a string of precisely accurate predictions. Two very different and very powerful roadblocks to a standard science.

I want to elaborate on the first one, because economics itself is the instrument of some of this social engineering.

To begin with, individual preferences are rarely natural; they are engineered by a large amount of learning, indoctrination, and group reinforcement. The response of individuals to this policy or that policy, is rarely natural; usually it has been socially engineered.

Even the belief that market solutions are the best solutions is socially engineered. The default preference that markets are always best is scientifically false. Sometimes it may be that a government solution to a certain problem is best. (Why? Because institutions reduce common transaction/ transformation costs, therefore gov’t can be efficient; and also the reduction of that cost is a savings in your time, therefore the gov’t solution may also be freedom-enhancing). Boulding, Coase, Ostrom all made this observation from different aspects. Really this has to be decided empirically in every case (for a very different logical reason: you will always be dealing with two logical types of connections in the same policy issue; thus it is a like a Wittgensteinian language-game that is demonstrated in the performance thereof). I think there is a very good case to be made that retirement security (such as U.S. Social Security) is an example of such a non-market good.

But the problem of engineered preferences in economics goes one step further, because economics is the thing that has been doing some of this social engineering. It is a main promoter of the efficiency and freedom of markets. It has chosen market liberalism as the default politics that is supposed to be the preference of the producers and consumers in the system. The simplistic idea that economists can do falsifiable science for a useful basis for making policy decisions (Chetty again) sidesteps this self-reflexive condition.

How many economists have ever pointed out that acting upon Milton Friedman’s recommendation to privatize the U.S. National Parks System would be ecologically insane? I will save you the trouble of responding; the answer is, “Exactly zero economists have ever pointed this out.” How can this remarkable fatuity be true?

Parenthetically, I don’t think the question is whether economics is a moral science. Economics is automatically a moral science because “moral” originally means “concerning the principles of good and bad behavior”. It cannot help but be a moral science because it deals with what happens between and among people.

The real problem with economics is different: it is an ideological instrument that inculcates a specific set of values, while allowing its practitioners to deny this, when it is convenient to do so. In this sense, economics may be an immoral science.

@27 – you point to the problem with Ingrid’s critique of Pareto optimums that also bxg raises in @4. Strictly speaking (and by that I mean in the strict textbook economics sense), if you’re going to compare pareto optima, you should do that in _utility_ not in money/bitcoins. So if SZ is unhappy about AR getting all of the bitcoins, he’s receiving a disutility and the outcome isn’t pareto optimal. Or, in Ingrids example – if anyone in the population has a utility function that reacts negatively to increased inequality, any distribution that causes an increase in inequality is not pareto efficient.
Now, it is true that it’s not unusual that “utility” and “money” get equated by economists (because no one knows what utility is), but that’s not inherent in the concept itself. I don’t see anything in Ingrid’s post that would be an argument why pareto efficient utility changes aren’t always preferable.

More generally to Ingrid: If you want to convince economists that you’re arguing in good faith, starting out with the paper by Mankiw, which is a) highly unusual for an economics paper and b) consider ridiculous by the vast majority of economists (https://twitter.com/Noahpinion/status/346853962739240960 ) strikes me as a terrible strategy. I think you have important things to say further down, but if you start a talk (or blogpost) by batting down the mother of all strawman (and thereby suggest to the present economists you think they’re like Mankiw) – you’re not off to a good start…

How many economists have ever pointed out that acting upon Milton Friedman’s recommendation to privatize the U.S. National Parks System would be ecologically insane? I will save you the trouble of responding; the answer is, “Exactly zero economists have ever pointed this out.” How can this remarkable fatuity be true?

If you think something is so remarkable to be almost incredible, it may be worthwhile to invest some time checking whether that’s actually true. Criticism of Friedman’s argument for privatizing national parks is common in economics. Weisbrod developed a theory of “option value” to criticize it in a pretty influential 1964 article:http://www.jstor.org/stable/1879478
some years later, a couple of economists present empirical evidence and emphasize, among other things, the environmental costs of Friedman’s proposal. From the abstract:

option value and other preservation values represent important social benefits, and should be added to the aggregate consumer surplus of recreation activities to determine
the total benefit of environmental amenities to society. In the absence of such an es-
timate, insufficient resources would be allocated by society to preservation of unique
environments such as pristine mountain streams where mineral and energy develop-
ment may irreversibly degrade water quality.

Both of these published in QJE, hardly an outsider journal.
(I’m not an expert on this — took me about 10mins to research).

The idea that all economists think the market is always better is also rather odd. See e.g. Arrows old&famous article on health economics, obviously Akerlof’s work on market failure, Coase and Ostrom who you cite yourself – all of these winners of the maligned Nobel Prize.

“As many have argued, the Pareto-criterion remains agnostic about the fairness or legitimacy of A as the starting point.”

The choice of our optimality criteria, and how much value we will place on them, is a huge ethical call. I had a post that was in Mark Thoma’s links, “Perhaps the Biggest Libertarian Bias in Economics”. I wrote:

Clearly it’s hard to get a more pro-libertarian and anti-utilitarian bias than saying I’ll almost always make Pareto optimality (changes are only made if there is unanimous consent) a central focus, and almost always completely ignore total societal utils (changes can be made if it’s for the greater good). You’re virtually coming right out and saying I’ll almost always be a libertarian in my analyses and almost never a utilitarian, or anything in between.

This fundamentally underlies, and profoundly influences, economics towards libertarianism. For example, it allows the profession to by and large ignore the fact that severe diminishing returns of utiltiy from dollars means that substantial progressive taxation can skyrocket total societal utils.

@Chris It’s not always wrong. For example, scrapping subsidies to oil companies would be a potential Pareto improvement, but it would be better to keep the money for something useful than to give it back to the shareholders as once-off compensation.

But, mostly it is wrong. The central claim of neoliberalism is that if we pursue all the PPIs indicated by (the free-market version) of economics, the gains and losses will net out in the end, leaving (nearly) everyone better off. That is, consistent PPIs lead to real Pareto improvements. That’s proved false partly because the net gains haven’t happened and partly because the same people tend to be winners and losers every time.

I was always taught (in what I regard as my unexceptional economics classes) that we do not know what society’s welfare function is, including preferences over distribution and fairness, so we should be very careful about making claims about policies or whatever that, for example, make the rich better off whilst making nobody else worse off (in material terms – but not necessarily in utility terms, if we are thinking people have preferences over inequality). There a bit in the main grad school micro text book about it, about how you’d need to assume the existence of a social planner that redistributes in accordance with the social welfare function if you want to assume making the pie bigger means being better off.

This is a puzzling post. Economics begun as the study of “political economy” – and was very much considered a branch of moral philosophy. It became “economics” because its practitioners wanted to decouple the study of the fundamental laws which economic systems must obey from vaguer, moral considerations. Barry Smith has written about how almost all sciences evolved in this way – decoupling themselves from the “mother ship” of philosophical enquiry. It’s a line of reasoning that ends in Wittgenstein – that all that remains for philosophy is what untangling the confusions of natural language. But I digress.

The interesting point here is whether it has been useful for economics to do this – whether economics can indeed be a science. Obviously it’s difficult, and there’s a necessary debate about what simplifying assumptions can be made, and what conclusions it is safe to derive from these assumptions. That economics should be explicit about the assumptions it makes is an essential requirement of any pretension to being a science. With regard to efficiency, I think economists are often guilty of John Holbo’s famous two step – many seem to act on the basic premise that markets are “efficient” in the broadest of senses, but then defend themselves when questioned by falling back on narrower, technical definitions of theoretical interest but little practical relevance.

Indeed, Pareto efficiency is an interesting example here. One could say that the importance of Arrow-Debreu is precisely that it formally defines the way in which a certain, equally well-defined market system is efficient; indeed, even Eugene Fama’s work (looking at “efficiency” in a different sense) is praised even by those who disagree with his conclusions exactly because it establishes precision in meaning. And a previous commenter was surely correct in noting the unusual nature of Mankiw’s argument – very few economists, even on the right wing, argue for policy changes on the grounds of Pareto efficiency in the technical sense (which does not mean “making everyone better off”).

In a narrow sense, the job of economists is to find out how to efficiently reach a desired social goal. Moral preference is involved in choosing which goals to analyse, but this is not unique to economics – an economist who chooses to study “how the perfect market works” is making choices with real world consequences in exactly the same way as a physicist choosing to study the structure of the atom. Yet ultimately these are political – moral, if you will – choices to be made by the whole of society. Economics itself is no more moral or immoral than atomic physics.

I wish more economists had better morals (i.e. more like my own), and were more interested in finding solutions to the problems I care about. And (as a non-economist) I’m fascinated (but agnostic) about the question of to what extent the nature of society can/can not be explained by hard rules derived from simplified behavioural assumptions. But I think, that if your answer is “not at all”, you’re not calling for a new moral economics – you’re calling for the end of the discipline.

A bit of historical background: Political Economy at Cambridge used to be taught as part of the Moral Sciences Tripos (= funny Cambridge word for a degree course). Alfred Marshall became lecturer in Moral Sciences in 1868, for example; the central figure was Henry Sidgwick, who not only wrote The Methods of Ethics but also his own book on Principles of Political Economy. (The degree course was a very small one, and when Sidgwick was asked whether he might lecture in a more popular style, as T. H. Green did in Oxford, he is supposed to have replied that, ‘if I would, I could not; and if I could, I would not’.) In 1903, political economy began its drift away from the Moral Sciences, with the creation of the Economics Tripos (which still exists today)–I think the chief motivation was that the economists wanted more students than they were getting through Moral Sciences and perhaps also History–and I think the first new faculty post in Economics was awarded to the young John Maynard Keynes. The Moral Sciences Tripos continued at Cambridge, where it was in the fullness of time renamed “Philosophy”; the name survives today in the Moral Sciences Club, better known from the days of Russell and Wittgenstein, which continues to meet as a place to discuss philosophy.

I know dumb numerical interpersonal utility comparisons are verboten, but I’ve always felt life would be easier (in a good way) if we acted as if we could make such comparisons. For example, if we did just assume everybody had the same utility function with diminishing marginal utility in consumption, and we want to maximize the sum, then we’d raise social welfare by redistributing from rich to poor. Also a Pareto improvement that involves making the rich better off would be dominated in welfare terms by one that makes the poor better off. So these Pareto improvements that you worry economists would thoughtlessly endorse – such those making the rich better off – would be easily countered by: yes but *this* policy would be better because it makes the poor better off instead, so the welfare gain is larger. Actually, the fact that lots of economists do think in this way (dumb utilitarian welfare maximizing inherently in favour of redistribution) is one of the things I like about economists.

Excellent thoughts on an important subject. I do, however, think that there are stronger arguments against Pareto efficiency as a criterion. Amaryta Sen makes the argument, among others, in “On Ethics and Economics” that Pareto efficiency can fail because it is based on desire fulfillment and those who are downtrodden may have been downtrodden for so long that they no longer even aspire to certain goals that they see as out-of-reach. Additionally, introducing changing preferences over time, rather than a static preference setup, leaves open the possibility that Pareto efficiency in one period may not correspond to Pareto efficiency over time.

Several commenters have put forward the position that inequality being intrinsically undesirable would entail that any result that increased inequality (without compensation) would preclude Pareto efficiency. Although it can be argued that this position is true linguistically, the conception of utility functions that include macroscopic considerations such as overall income inequality are likely to make general equilibrium immediately incalculable. As opposed to usual utility functions that are based on bundles of goods and services, these utility functions would introduce serious feedback from the macro level to the micro level. I think that you may be seriously overestimating the power of economic analysis if you think that this conception of Pareto efficiency would not descend into chaotic results.

There’s a very interesting and useful discussion of the events Chris Brooke discusses in 40 in in Bart Schultz’s terrific biography of Sidgwick, _Eye of the Universe_. The various conflicts between Marshall and Sidgwick over education reform at Cambridge are especially interesting. (There’s also some useful discussion of this issue, in some ways much broader than Schultz’s discussion, though in some ways more superficial as well, and Roger Backhouse’s history of economic though, _The Ordinary Business of Life_. That book doesn’t go into great detail about anything, but has a very useful discussion of how economics came to the state it’s in in many different ways in different countries.)

Adam.smith: “The idea that all economists think the market is always better is also rather odd.”

Then how did the public come to hold the opinion that economists think market solutions are to be favored? (It was the default assumption of both Coase and Ostrom, by the way.) Ingrid’s post is about the “direct and indirect influence on policy making”. There is a very large difference between what economists write to each other in journals, and the face that is presented to formulate policy preferences among the public. Where is the book as widely-selling as Capitalism and Freedom in which an economist tells the public that privatizing the national parks is a really stupid idea?

I took Prof Robeyns’s point in the OP not to be (or not so much) ‘economists have moral beliefs like everyone else, and should come clean about it’ but the much more fundamental ‘if we want to study economics, we have to do practical philosophy (amongst other things)’.

The latter claim seems right to me: the study of economics needs to involve the study of social goals, well-being (on which Robeyns has done important work, of course), and rationality. We can’t just take as read the social goal as efficiency, well-being as preference-satisfaction, and rationality as maximising expected value, and once we start paying reasoned critical attention to those normative ideas, we’re doing philosophy.

Then how did the public come to hold the opinion that economists think market solutions are to be favored?

A good question. My own conspiracy theory is left-wing sorts want to portray economists as neanderthals who offer only simplistic catch-all policy prescriptions, and that right-wing sorts want to portray economists as genii who offer a simple, all-encompassing policy prescription. Neither are correct.

Thanks for the many interesting points. I need to respond to a few important questions of clarification and objections – but unfortunately am offline for the next 52 hours (I had hoped to respond before but sometimes life runs not quite as you expect it to go). Sorry!

Pareto optimality is a stalking horse for Kaldor-Hicks efficiency. Kaldor-Hicks efficiency is used as a form of sophistry that weakens opposition to policies that increase inequality. The actual critique of pure, theoretical Pareto optimality arising from the problems of measuring and operationalizing the values/utility/whatever that is being traded off to establish and compare relative levels of well being ex ante and ex post is interesting, but it is of much less practical importance than the fact that the entire intellectual tradition is defined by misdirection and dishonesty in the service of policies that create and sustain economic oligarchy.

A structural Marxist might suggest that pure Pareto optimality is a concept so seldom correctly used or applied in real policy debates that arguments about it grant the victory to the Straussian sophists who are engaged in well compensated careers spinning the webs of hegemony.

So why do people think that economists always prefer markets? A number of things:
– the political right has been incredibly successful and influential in pushing such a view. That’s especially true for the time were Friedman was a towering public figure and such views take a long time to disappear.
– Microeconomics 101 as it is taught strongly suggests such a position and people treat it like the gospel. What I call “Econ one-o-oneism is a very serious problem. That’s partly the responsibility of economists (and I think economics should re-think it’s undergrate curriculum), but it’s also just people being intellectually lazy.
– “the public” is poorly informed about the content of a lot of disciplines. See what people think academic philosophers do, e.g.

I would think the use – the only use – of Pareto efficiency is to use it as a paradox: in no possible economic system could it apply, except one that was captured in an eternal presence. Inequality is not simply a statistical artifact, but a dynamic: if a process makes x better off, x will want more of it. It is easy to see that the effects of inequality will magnify over time in a number of domains, like education and health care, and finally in upward social mobility. In other words, one can’t abolish class struggle by fiat.

The point of the Mankiw example is that Mankiw likes to make rich people richer at the expense of poor people, but no one is allowed to point out how depraved that is, in terms of ordinary human values, because Pareto Optimality — a bit of opaque technical jargon — is introduced to distract both economists and their audience. If economic concepts were less morally opaque, economics would less evil.

Adam Smith: “More generally to Ingrid: If you want to convince economists that you’re arguing in good faith, starting out with the paper by Mankiw, which is a) highly unusual for an economics paper and b) consider ridiculous by the vast majority of economists”

So the author of the standard economics textbook and professor at Harvard is not worte a ridiculous paper and has suffered no repercussions. If the paper is so ridiculous why does he have his position and infulence? Do you think a Harvard biologist who wrote a paper in favor of creationism would still enjoy influence at the country’s most prestigeous institution of higher learning?

And there is the problem with economics: highly influential people can say “ridiculous” things in their field of expertise and still be considered experts. Also it is not knocking down a strawman when someone is actually making that argument. Police yourselves before you go about complaining that people are pointing out that some of the most respected economists in the field say things in research papers that are manifestly ridiculous. You go to debate with the economists you have, not the ones you wish to have.

Do you think a Harvard biologist who wrote a paper in favor of creationism would still enjoy influence at the country’s most prestigeous institution of higher learning?

if only there was a famous, influential biologist notorious for saying insane things in his field of expertise. Ah yes:http://en.wikipedia.org/wiki/James_Watson#Controversies
And yes, he did take it too far and had to resign his post in the end – but that was an administrative post and look at some of the things he said before. And he most certainly wouldn’t have lost a professorship over this. Quick googling suggests that “The Double Helix” is still found on many syllabi (haven’t read it, but I understand it’s a great book, so why not).

The choice of Mankiw is simultaneously useful and misleading. Mankiw is certainly aware of arguments against Pareto optimization, but adopts a stance of wide-eyed innocence to say that no one could object to Pareto improvement. Mankiw is remarkably consistent in being stupid when it serves the purposes of his political masters and otherwise quite smart. Being stupid as your masters require is one level of subservience, but if you really want to smooch some Koch butt, you flag your pretense of being over the top about it – put a finger to your dimpled professor cheek and use gosh-oh-gee-like utterances. “No one could object…”

Noting Mankiw’s behavior is misleading because he is not an example of a benighted economist who has mistaken simplifying assumptions for reality. Noting his behavior is useful because it gives a clue as to why so much of the economic profession seems to have lost the ability to tell what is a simplifying assumption and what is an assertion about the real workings of the economy.

Really like the efficiency of what point, and possibility of a change not being and being a Pareto improvement (depending on the metric) is really tantalizing, though I am having trouble envisioning such a scenario.

Of course it’s one think to make all Pareto improvements, and say they should be made. It’s another things to rule out changes on the grounds that they would not be Pareto neutral or Pareto improvements. Pareto optimal states may well be morally repellant.

Isn’t Hausman and McPherson’s book on morality and economics one of the best? John Dupré has argued that there is no value-neutral way to construct an inflation measure.

On values and concepts, economics holds to a naive Darwinism. This deserves a lot more kicking than it gets.

On assumptions: macro-econ as practiced largely works with definitions that assume an infinite world of discoverable resources. (Note: not infinite resources, rather a wild frontier that means substitution etc. are always possible, esp. for labour.) This also deserves a lot more kicking than it gets – it’s the root of a lot of the moral structure in economics. “Economics is about allocation under scarcity” say economists, but ignore that there are assumptions built into a lot of theory about what is scarce and what is not…

There’s more, but I just wanted to note that it’s not just about Pareto.
Although, on Pareto, the fact that it’s a static analysis that has nothing to say about the fragility of systems seems like a basic problem. You can create a new system that is more in line with people’s desires, but in the absence of perfect information, who is to say that new system is robust?

Finally, as many have noted, where the rubber hits the road is with actual policy recommendations and the power hierarchies inside economics that mean whatever the theory (and Luis Enrique can always be relied upon to note, there’s lots of good work being done in economics) we seem to end up with the same old broken policy recommendations.

You can see this in macro for the last 20 years. I personally see it in Healthcare Org, where Healthcare economists operate (even in the UK, for frick’s sake) on the assumption that marketisation is a panacea.

To extend on adam.smith’s observation (in perhaps a direction he doesn’t agree with) the problem is that the average economist reverts to Micro 101 as soon as they are out of their special research area… So possibly a lot could be gained by fixing Micro 101.

In comparing possible states, one could eliminate some as clearly Pareto inferior to another; among the remaining states that are Pareto non-comparable one would need an additional criterion to choose among them. Kaushik Basu pays careful analytical attention to such distinctions.

In response to Mankiw’s disingenuous question: “if we can make some people better off without making anyone worse off, who could possibly object?”

As noted in the comments (Bruce Wilder, Calum Agnew, others), those who could possibly object include JS Mills, Adam Smith, Sen, and a large number of Public Finance economists including Musgrave.
I would add “all economists who accept diminishing marginal returns as an axiom of economic theory” as a group who could possibly object. A. Sen noted that a social welfare function is necessarily increasing in wealth and reducing in inequality because of this axiom. As a consequence, all changes that increase both wealth and inequality have a theoretically ambiguous impact on welfare. The overall impact depends on the weighting of wealth vs. inequality.

I would further include all non-economists as people who could possibly object.
As Bloix stated in the comments
The concept of Pareto optimality is not a moral judgment. The decision to optimize Pareto optimality is a moral judgment

By and large, the one percent aren’t interested in policies that maintain Pareto optimality. Merely maintaining their current share is never quite enough to people who’s entire lives have been devoted to getting more than the others. Which is why, for example, the rich suggest lowering Social Security benefits even though in an era of inadequate demand, money distributed to people who will certainly spend it will probably increase their wealth along with everybody else’s. Their calculus for optimizing economic policy contains a constraint, but it isn’t Pareto optimality. The purported necessity of budget reform comes from this requirement, and they’re probably correct about that. You can’t increase the current high levels of income and wealth inequality without cutting entitlement benefits.

@61
While your general sentiment is perhaps on point – social security benefits are not the example you want to choose. Social security benefits are paid for by the funds that workers pay into the social security trust. Reduction of benefits makes the trust last longer, but does nothing to make the lives of rich people better or worse (unless they are in fact drawing benefits then they too are fractionally worse).

The only way rich people or really any working person is advantaged by the reduction of SS benefits is if it allows the avoidance of a future tax increase. Its true that a cut in benefits might widen wealth inequality, but it doesn’t do so by producing anything of immediate value for the wealthy. It should be noted also that what is being proposed is not a cut in benefits but a change to way increases are calculated – the idea would be that the rate of increase better matches the ‘real’ rate of inflation (I don’t happen to believe all of that – but a slower rate of increase is a little different than a cut).

the idea would be that the rate of increase better matches the ‘real’ rate of inflation

The “idea” is to slow the growth of benefits, period.

The tool, Chained-CPI, is ideal because it has the veneer of a better approximation of inflation-as-actually-experienced. Only a veneer though, because Chained-CPI is not at all based upon the actual experience of SS recipients.

What little we know about the subject suggests that inflation as actually experienced by SS recipients is likely currently higher than either ordinary or Chained CPI measures.

But it’s a lovely veneer indeed, and it seems that the president and my Democratic representatives at least find it very useful in misrepresenting the topic.

Reductions in Social Security benefits directly benefit the rich by increasing inequality, which, I’m arguing, is a positive good from their point of view. Besides, as the well off are keenly aware, the obvious way to keep the trust fund solvent is to raise the amount of earned income subject to the payroll tax and that would impact them directly.

My thoughts echoed #21, 23 and the commenters who pointed out that economics was originally taught within political economy and moral philosophy.

Mankiw may suggest that people won’t object to a Pareto improvement if the rich get richer while no one else is hurt but of course he ignores the political element of inequality/equality.

(Perhaps it could be included in the equations?!) As the rich get richer and they don’t have the propensity to consume, they funnel the money back into politics and changing economic policies. Likewise as equality is increased and citizens become more financially secure, they will support politicians who protect their policy gains (like Social Security and Medicare). Or maybe not depending on ideology.

IIRC, Tony Atkinson said equality and financial security should *enhance* entrepeneurial and risk-taking culture. I agree. Doubt this enters into Mankiw’s Pareto equations. The right tends to argue that greed, outsized rewards and inequality helps produce risk-taking or that the fear of poverty drives people – like immigrants – to work harder and foster Pareto outcomes. Just spit-balling.

My personal theory is that it’s a legacy of the Reagan administration using shills with PhDs in the 80s very publicly to support the administration’s economic policy–I find it very embarrassing that when people think of economists, they might think of Laffer.

Bruce – That’s a pretty indirect PAST benefit and its hard to see how that acrued to the rich in particular vs. the general rate of taxation and indebtedness across the economy at large (which could favor income inequality at large, but probably as a result of other vectors moreso than SS surpluses). Now that SS is not generating surpluses, the point is somewhat moot. As I noted, reducing benefits now could avoid future taxation, but that’s a pretty distant benefit to be chasing, more likely a benefit reduction now would just allow existing balances to last longer and kick the problem down the road to a later group of rich people – a benefit possibly, but more in the sense of an avoided peril than an actual good.

JH – While its certainly true a rise in the earned income subject to payroll tax would harm the rich – I guess it depends where you would draw the line of who is rich and who is not. The prototypical 1% isn’t earning the vast majority of his wealth via payroll subject to SS taxes, but rather through capital gains. Raising the SS subject wage from about $110k to say $250k would primarily impact what we might call the 2%-20%ers who are wealthier than many, but not generally what is thought of when we think about plutocrats with both economic and political influence.

If general tax rates or capital gains tax rates were to be raised to fund an SS shortfall that would be a strong point, but such a thing has never really even remotely been suggested (to my knowledge).

As I noted, reducing benefits now could avoid future taxation, but that’s a pretty distant benefit to be chasing,

Those future tax increases seem quite relevant and taxes are used to subsidize pay-go systems elsewhere (e.g. in Germany – link in German, unfortunately). You give no reason for just brushing them aside.

Beyond that, there is also a larger political economy argument: When you convince a lot of people that all serious politicians need to be serious about “entitlement reform” you’re engaging in successful distraction. All the time spend on the mostly imaginary debate on our “broken entitlement system” is time not spent talking about our broken system of capital taxation, labor rights, welfare etc. Krugman e.g. has written and talked amply about this, so this is hardly a radical point to make.

@71
Except that’s not how it works. The payments for SS continue to come out of the trust as they always have. Apart from the brief tax holiday during 2011-2012, no part of social security payouts have ever been made out of the general taxation of the U.S. economy.

There is not to my knowledge any legislation that has ever proposed to begin funding any part of SS from general taxation – all of the proposals, such as they are, have been to either extend the amount of applicable wage subject to SS tax or adjust taxation rates or benefits (or both). Such proposals, as I commented to JH above, are far more likely to impact the 2-20%ers rather than the 1%ers which seemed to be the focus of the initial commentary.

To be clear, I’m not by any means an advocate of any sort of reduction whether by formula or otherwise….my point was primarily that SS benefit reductions have pretty limited benefit to the ‘rich’ as they are currently construed. On the menu of ways of protecting income inequality, this would seem to be a pretty low priority. Healtcare and items that have always come from general taxation have much greater immediacy.

(not about Pareto) I had intro micro in the mid 90’s at AU at time after the heterodoxs has largely been purged (though Robin Hahnel was still there, I actually had macro with him). The class was not taught by regular faculty but someone who had been working as a government economist for a number of years.

One of the canonical examples (and it may have actually have shown up on a final) was why the government could not just pay all the people who were living below the poverty line a basic income. (It doesn’t work, goes the explanation, because you create an incentive for people not to work with a guaranteed income so the number you have to pay would grow larger than you budgeted – or were constrained- for).

Now the principle is valid and important for understanding the idea of incentives and how market equilibrium changes but talk about your propaganda posing as pedagogy. It is fairly well deliberately set up to imply or assert the venerable “the poor you have with you always”.

The example begged a number of real world questions (and facts), more important, I would argue, than figuring out that market equilibria change. Like:
So what happens in the Euro-welfare state and why is that a different case (i.e. they do seem to be able to substantially reduce poverty through spending) from what the example talks about?
What incentives would make people decide to give up work and go on the dole?
Is there actually enough money in the economy to guaranteed an income to both
the poor and working poor who would easily give up their crap jobs?
And so…

So there really is a vulgar, obsfucating Econ101, philosophy taught as science, out there propagated within the discipline itself.

Neither are correct in believing that economists have a default position to favor market solutions? Or neither are correct, because economists really don’t offer catch-all policy prescriptions? You appear to be wrong on both counts.

Adam.smith #50: “Doesn’t argue with the National Parks issue specifically (presumably because that recommendation never got any traction. I don’t know a single Republican even among today’s crazy-folks who wants to do that), but it it is a prominent, mainstream economist forcefully arguing for the role of government… If you’re looking for specific policy advice by economists…”

–“People” treat micro “like the gospel”, and this is “partly the responsibility of economists” but other “people” (students, other economists?) are “intellectually lazy” for not seeing through the charade?

There is a lot of “specific policy advice by economists,” yet still, “the public is poorly informed”?

Conscience of a Liberal is as widely-selling as Capitalism and Freedom?

Pseudonymous #69 — You may be surprised to find out how little regard most people have for economists. I am not sure whether a poll has ever been taken, but in my experience, most people think economists are as intellectually honest as politicians. Economists will argue that a problem has been addressed because another economist has written a paper or a book about it.

Lee – I don’t think these questions are particularly clever, let alone insightful and I’m still waiting for you to wipe the egg off your face re: your assertions of economists not disagreeing with MF on National Parks, but I’ll give you the benefit of the doubt and assume you’re not just trolling and try to answer:

–”People” treat micro “like the gospel”, and this is “partly the responsibility of economists” but other “people” (students, other economists?) are “intellectually lazy” for not seeing through the charade?

Anyone who takes one economics class and thinks they understand economics is intellectually lazy – that applies to students and people who once were students (Matt Yglesias, e.g., who took econ 101 with, yes, Mankiw at Harvard goes through terrible phases of econ 101ism, though he also at times bothers to read deeper and then has more interesting things to say, e.g. here). As I say, the way undergrad micro is taught contributes to that tendency, but, yes, I also blame people who take one intro class to pretty much anything and think what they’ve learned is the enough to understand the entire discipline.

There is a lot of “specific policy advice by economists,” yet still, “the public is poorly informed”?

yes. Shockingly, many, many people aren’t terribly good at (or even interested in) following complex debates. It doesn’t seem like you, for example, were aware of these decidedly non-market positions not just held but publicly advocated by prominent economists. There is also a large amount of good popular science writing, yet a lot of people are completely clueless about basic science. In the US, e.g., you can take climate science as an example. Do you think it’s the fault of climate scientists that so many people in the US are so hopelessly misinformed about climate change?

Conscience of a Liberal is as widely-selling as Capitalism and Freedom?

well, probably not, though numbers are hard to find, but my point is that Krugman is the best known and mostly widely read living economist and he certainly isn’t associated with blindly favoring markets all the time. I’m sure he would like to sell more books, but you can’t really blame him – or the entire discipline – for that, can you?

Ok, I’ll explain it. Someone has to. Here’s a meta comment on all the comments.

@2 “a model where the king owns everything and everyone one else owns nothing can be considered Pareto optimal.” – yes, as it should be

@3 “Efficiency” may or may not be identified with Pareto Optimality. In fact, often a fallacy of equivocation is committed in such instances.

@6 “Making someone worse off to make someone else better off violates the Pareto criterion, and that’s distributional.” – that’s why Pareto is silent on such things. Pareto improvements may be distributional but they are not re-distributional

@8 Is that why we “like” it? Or is it simply that at some point you have to have a very basic definition – a starting point – of efficiency if you’re going to do economics. Do we let it slide? Some maybe do.

@11 You may be right, but that’s not what Pareto Optimality is about

@12 The definition of Pareto Optimality already includes that

@13 Comment is in bad taste and utterly stupid. It is also wrong.

@18 Interesting, not sure I buy it though, unless this is something to do with Arrow’s Impossibility Theorem in some way.

@20 That’s not Pareto Optimality

@24 Yup.

@25 John Q if I guess right as to what you’re alluding to, I disagree. Neither in Pareto or in Kaldor-Hicks is there a presumption of the Tyranny of the Status Quo. Neither should there be. It *really should* be only “potential compensation” not “actual compensation”

@27 Yes but not in the way you’re thinking. Both 5-5 split and 0-20 split are Pareto optimal. SR is worse off under the 0-20 split so that does not dominate the 5-5 split. AR would be worse off under the 5-5 split so that does not dominate the 0-20 split. They’re both Pareto optimal. They both Pareto dominate the 0-0 situation, hence 0-0 is not Pareto optimal.

Without potential for transfers that exhausts what you can say about the situation. Now, if you got transfers and AR gets 20, and gives 5 to SZ, then that Pareto dominates everything else and that becomes the Pareto Optimal outcome. What matters is the institutional transfer technology.

@32 27’s comment doesn’t really have anything to do with bitcoins or utility. Just relabel it. It doesn’t matter. Rest I agree with.

@35 No, you (and quite a few others) are confusing Pareto Optimality with a Utilitarian Social Welfare function. And not the right one at that.

@39 Moral preferences are involved in choosing a Social Welfare Function, not Pareto Optimality (unless you like it when people are worse off, but I’m restricting the set of possible moral preferences to ones which are not sadistic)

@41 Luis, most of Social Choice Theory was devoted to basically coming up with clever ways of making such comparisons without actually making such strong assumptions. Depending on how you feel about Arrow’s theorem it may or may not have been a dead end.

@42 I think that’s quite a legitimate insight Sen’s got there and if you want to highlight shortcomings of PO itself (rather than how it’s sometimes used) that’s the way to go

@44 The perception is a hangover from the 70’s and 80’s. It used to be back in the day that the public thought of Economists as meddlesome planners

@49 At the first sentence – Yes!!! At the second sentence – No!

@51 and as a building block for more complex concepts like Social Welfare Criteria and crazy impossibility theorems

@52 You know, I haven’t actually read whatever writing of Mankiw is being referred to. If that’s how he’s using Pareto Optimality then he’s monkeying it up and should be ostracized in public (public public, like the town square, not the internets). But I doubt that’s what he said. You probably imagined he said it.

@60 No, whether there’s diminishing marginal utility is irrelevant. If you make somebody better off by epsilon, and nobody worse off that’s still a Pareto improvement.

And then this: “As many have argued, the Pareto-criterion remains agnostic about the fairness or legitimacy of A as the starting point. “

This is just incorrect enough to be wrong (ha!). There is no “starting point” in the Pareto criteria. It is in no way intertemporal. It does not treat the present or the future any differently. Every possible situation is compared to every other etc and there’s none that “come before” others.

Finally, let me ask a rhetorical question. And then since it’s a rhetorical question, let me sort of answer it.

If the Pareto criteria is not “value free” then what value exactly does it promote?

[***At this point PLEASE STOP confusing Pareto Optimality with Social Welfare or productive efficiency. Thank you.***]

“Efficiency”? OK, but

1) how would you know it does without defining efficiency in the first place? And
2) I got this suspicious feeling that any definition of the notion of “efficiency” will privilege the idea of efficiency.

Adam.smith #82 — I rather doubt you could find a majority of economists, much less op-ed pundits, who could adequately state why Milton Friedman is dead wrong on privatization of national parks or Social Security, for that matter. Try convincing Martin Feldman for example, or some libertarian at Chicago. And the problem gets worse the further down the line you go — most high school economics teachers would be totally lost at sea, for example. (By the way, I follow this stuff pretty closely, and it is simply untrue that there is not a sizeable contingent of libertarians, states’ rights advocates, and Wise Use dead-enders who want to privatize national parks. And the reason they have NOT been privatized has nothing to do with economists’ refutations concerning public goods in the AER.)

But I am more interested in your defense of economics as a policy science that affects individual preferences. Is it your position is that economists have covered everything more or less adequately, corrected all the misleading statements by the various economic panjandrums, and communicated it to the general public, — and so, if the public doesn’t understand, it is the public’s fault?

Notsneaky #85 “@44 The perception is a hangover from the 70′s and 80′s. It used to be back in the day that the public thought of Economists as meddlesome planners”

I’m pretty sure that one of us is not living in the present. I don’t have an opinion poll at the ready, but my experience is that most people think economists are imperious clowns, and in addition they are sometimes bought-off by a special interest. The recent dismal performance of economists concerning the financial crisis has proved more of the same. Still, there is a default presumption in favor of markets, which by now is well-inculcated among the hoi polloi.

Is not a relevant point that even classical economics, which is totally utilitarian, is dependent on the utility function you use. Discount marginal wealth sufficiently aggressively, and you can make an argument for communism in a cave. Not that I actually want to argue in favour of communism in a cave, but there is no ‘God given’ normative metric (actually, now that I think of it, St. Francis, who was better qualified than most to say what is God given, would surely have argued that an L_inf metric is the one to go for).

Yeah, and I know this does not directly attack the Pareto principle, but it is an argument that local optimums are not enough.

‘The Pareto-criterion compares two social states, A and B, and makes a claim about whether the act/policy/social change that brings us from A to B is desirable or not. If in B all individuals have at least the same welfare/utility/wellbeing than in A, and at least one of them has a higher level, then moving from A to B is a Pareto-improvement, and the Pareto-criterion recommends the move from A to B on grounds of efficiency.’
Actually, when you say is A is better than B you are saying something about your Social Welfare Function. You can give a negative weight to a rich guy’s marginal utility. The problem is you will have to use up resources to prevent the rich guy and the poor guy doing a deal. The story doesn’t end there. Pareto himself talks of ‘residues’ and ‘derivatives’ and Boulding introduces considerations from Evolution. So there’s a different notion of dynamic efficiency which is ‘value’ free.
Economists won’t benefit from talking to Ethics guys. Nobody does. They do need to remember that guys who teach tend to get dumber over time because they are associating with ignorant people- i.e. students- and stupid people- i.e. other teachers.
The other thing is people who write articles- whether for money or because they like to see their name in print- are bound to be, in the main, wasting your time.

If the Pareto criteria is not “value free” then what value exactly does it promote?

The nastiest assumptions are those you don’t realise you’re making.

[Just another manifestation of the same general problem: from your own perspective, the mistakes you make look different to the mistakes other people make. People draw the right conclusions from their perspectives, pretty reliably: it’s the perspectives themselves [your unknown assumptions], not the thinking processes, that are where the problems come in. And spotting the errors in a ruler using only that ruler is… difficult: you can’t introspect yourself to correctness.]

The point, again, is Professor Robeyns’s post: economists need to be much more aware of the values they endorse.

In pursuance thereof, we might point out that evolutionary biologists are united on their subject, and in addition, their subject does not impact policy about jobs and inequality. Economists, unlike evolutionary biologists, have a rhetorical default position (call it “market efficacy”) for the purposes of teaching and other public discourse such as editorials, yet it is not always true.

It is not always true, yet for decades it has been promulgated: forming and reinforcing individual preferences about public policy decisions that directly impact people’s lives. It is not always true, yet it sufficed, but now it is causing us a lot of trouble.

I am sitting here looking at a shelf with every Krugman book going back to Peddling Prosperity. The fact that Krugman has recently changed to a more social-democratic position is encouraging, but even he still defaults to the market standard. Nor does the rest of the profession get to hide behind him anyway; nor indeed would a libertarian such as Eugene Fama care to.

Indeed we could point out further that it is far easier to excuse the public of its views on evolution, since religious experience introduces an arational psychological operation, one that has salutary emotional and “spiritual” effects, if not conducive immediately to good scientific understanding. Moreover, this has been going on presumably for millennia. It is much more difficult to accept that the U.S. public’s default position in favor of small government and free markets is similarly a natural “evolutionary” response, since the market system hasn’t been around that long, there has been a lot of resistance, publics in other countries do not hold this position, and the evidence is that economics popularizers have done a big job in propagandizing the public, while economists who now say they know better have mostly been hiding in cubbyholes, hoping their funds won’t be cut off.

Indeed one might guess instead that a fairly religious public would have defaulted to a more communitarian point of view.

So the point might be for you to explain how this state of affairs has come about, while you try to keep economists free of blame for any of it. Start by explaining most economists’ support over decades for Thatcher-Reagan neoliberalism, I write “most” because there was not a single objection on the op-ed pages, much less the technical journals, that made a public impact. Because this is about POLICY. Let’s not bother with all the economists who now say they didn’t support it: explain the ones who went along with it. Are economists arational believers too?

@86 – wow, there’s some massive goalpost shifting going on. Suddenly I don’t just have to find “one single” economist but “a majority” – heck what do I know. All economists I’ve met (and you don’t sound you’ve actually spend much time talking to live economists) would take about 10secs and then say something like “that’s bullshit. He doesn’t even try to internalize externalities or account for uncertainty.” But no, I don’t have a representative sample on that. It’s certainly possible that high school economics teachers are terrible, since I didn’t go to high school in the US I have zero knowledge on that. That’s a problem – I suspect the textbook commissions, many of which have been capture by Republicans, would be a good place to look.

I don’t know why you think I deny there are right-wing economists. There certainly are. More so than in many other disciplines. I think they’re wrong. Many other economists think they’re wrong. The majority of academic economists in the US votes Democrats. I don’t know what that tells me about the discipline except that economists disagree about policy and values.

I’m also nowhere defending all policy advice ever given by economists. A lot of it has been terrible (cf. Sachs in Bolivia) some of it may well have been criminal (cf. Shleifer in Russia).
I’m just saying that’s not all of economics and I think pretending that it is, is stupid and – to recycle the term, intellectually lazy. I’m arguing against your grandiose blanket statements about economics. I’m certainly not arguing that economics is flawless (or even that it should continue doing what it’s doing right now).
And yes, I do think that the public perception of economics is pretty wrong and no, for the most part I don’t blame economists for that (I don’t blame the public either – why should everyone care what academic discipline xyz does). The broader public has wrong perceptions about pretty much every discipline. If anything, I think economists are spectacularly good at communicating their work compared to almost everyone else. And that includes a lot of work that has very little to do with the libertarian caricature of economics you’re painting, which sounds a bit like the Chicago economics department in 1987 (for some prominent examples see e.g. Duflo on development, Finkelstein on health care expansion, Rodrik on globalization and democracy)

LFC @95 Hahnel was a great macro prof, we had a fairly post-Keynesian take on macro, inflation, market inefficiencies, introductory environmental economics. etc. I had him immediately afterward for political economy (where we looked at parecon, Romer market socialism, etc), the classes blend a bit in memory.

He made one comment which seemed really significant at the time but which he never unpacked along the lines of “there’s something really weird about how banking works” Very smart and rigorous guy, btw. Easily among the most intellectually stimulating classes I took.

@Bruce Wilder and others: “It is simply wrong to say that Pareto Efficiency ignores distributional issues. Making someone worse off to make someone else better off violates the Pareto criterion, and that’s distributional.”

I simply don’t understand this or the implications you and others draw from it; what do you mean by “violates the Pareto Criterion”?! I used to understand and believe (I hope I’ve matured since then!) that “Pareto improvable => not good”. But in the darkest depths of my delusion, I would never have imagined to take the further
non-logical steps (“not Pareto improvable => bad,” or “X is not an Pareto improvement on Y, therefore X is not not better”). But what you say (forgive me, I do seek clarification) sounds like such illogic: state Y isn’t Pareto comparable to state X, therefore it’s something (I don’t get this what you are suggesting: , not as good? worse? not worth considering? what?) relative to Y. Pareto comparisons punt: X and Y are not comparable by a (designed to be very restrictive) comparision. So what?

Someone’s going to produce an example of an economist who thinks Pareto comparability is equivalent to moral comparability. That’s fine, but let’s all concede the obvious: that’s certifiabily insane if sincerely held. A more interesting question is:
are there examples where X is Pareto superior to Y, but under some reasonable system of morality Y is better than X. I sort of think there are, but would love to hear more thought-out views on that question.

@ Adam.smith #98– Duflo etc. do terrific work. They find specific results to achieve certain ends. But I think this is another version of Eric Schliesser observation (in the post linked by Ingrid Robeyns at the top) that the method does not produce “robust” knowledge. In this sense, i.e. in the sense that economics is a tookit (Brad DeLong’s view) for local problems, I have no objections at all. In fact I think it is fascinating. But I also think Daniel Davies is correct to observe that economics is a nice little subdivision of control theory that got too big for its breeches.

My “grandiose blanket statements” about economics are related to this image: its self-presentation, its pose, as a necessary policy discipline (in addition to a criticism of some of its more grandiose practitioners). The subject all along here is policy. I don’t think that economists deserve to get a free pass out of the dilemma that their own discipline is misunderstood by an uncomprehending public — not if they mean to affect policy. It seems to me that most of the public is justified in believing that economics sees itself as a grand theory — and that it is highly suspect as such, because the results have been less than exemplary. Why does it matter if some economists were against tax cuts for the rich, or were against deregulating derivatives? It happened anyway, it affected everybody and still does, and the economists in opposition at the time, if there were any, did NOT come out in force as a whole, to say it was wrong, wrong, wrong, a hundred times until everybody heard it. Almost nobody heard it. I think the real problem for your defense of economics is that, because it is very much a policy-orientated discipline that affects everybody, economists will continue to be on the hook for system-wide events whether they like it or not, and they are themselves uniquely responsible for what everybody thinks about it.

This is not true of something like evolutionary biology.

If economists said on the other hand, “it could be this way or that, but we really don’t know what to do,” (a much more accurate statement), then they would have less responsibility in this regard, and it would not further tax the public’s bounded rationality or its overdrawn attention budget.

I wrote that economics chooses market liberalism as the default preference of producers and consumers in the system. This is not the same thing as libertarianism. Some economists are libertarians (e.g., Eugene Fama). Others, like Paul Krugman, have recently turned more toward social democracy. But even Krugman still talks in terms of markets.

Can you construct a defense of government involvement in the economy that does NOT make a reference to markets or market failure? I am pretty sure it can be done.

I am already familiar with the kinds of market failure. However, the correct answer to why privatizing national parks (or at this point, developing any wildlands, anywhere) is “ecologically insane” is NOT an economics answer. It is ecologically insane because there is something like an “ecological genetics” which would describe how the condition of interacting with all the other relevant species in the ecosystem, affects the survival and robustness of wild genetic health in any single one of the populations. It is supposed that wildlife species need a requisite number of individuals (usually pegged to be at least 500 individuals in each population, though it may be a lot more) interacting with a large number of other species in regular patterns of predations, competitions, and mutualisms, in order to be genetically healthy, thus to avoid local extinction, and thus to support possible future speciation. This is why Milton Friedman was wrong: he stepped outside his discipline. Now, any wildlife biologist can tell you this. Has any economist ever said it?

Lee’s point is pretty basic but he hasn’t seemed to figure it out yet–that not speaking out against something is tantamount to tacit endorsement. This is pretty ludicrous. Most academics don’t want to get into the spotlight–that’s why they’re academics!

And as for “Why does it matter if some economists were against tax cuts for the rich, or were against deregulating derivatives?” It matters because you’re laying the blame at their feet, and not your own for electing politicians who are going to pursue their pet policies regardless of evidence, who are going to find someone with a credential to get behind them. That’s why it matters.

@103
“This is pretty ludicrous. Most academics don’t want to get into the spotlight–that’s why they’re academics!”
But they write articles and books and reports from a point of authority and stand up lecturing to students and make judgements as to awarding grades and might advise government or business or all sorts of things. It is a much more spotlighty and influential kind of profession, than say, painting houses, or cleaning, or accounting, or anything like that.

“My view is this: economics shouldn’t aspire to be a value-free science, but an intellectual enterprise that combines elements from the sciences with elements from ‘the arts’”
Insofar as I can understand it, the discipline is mostly arts plus mathematical representations and projections (maths folks version of verisimilitude) – I guess perhaps the behavioural economists and their like might be trying to do science in their safari suits and all.

“done in a manner that makes its value-commitments explicit.”
While this would be good I get the feeling you might have something of a battle on your hands in trying to make some actually existing economists not only aspire to this but also practice it in public.

notsneaky @85
“@3 “Efficiency” may or may not be identified with Pareto Optimality. In fact, often a fallacy of equivocation is committed in such instances.”
I wasn’t sure about that, and I’m still somewhat unsure about what exactly Pareto Optimality is meant to be then? You seem to imply it’s something to do with transferring money or various material goods? “Now, if you got transfers and AR gets 20, and gives 5 to SZ, then that Pareto dominates everything else and that becomes the Pareto Optimal outcome.” But would it be more optimal for AR to give SZ 10 then? And what if there are more than two people at the same time or over time? And how did AR happen come by 20 in the first place?

I have to admit I am unlikely to ever go to the trouble of reading Pareto myself when it seems like the maths parts would be over my head and I would find the intentions disagreeable anyhow.

The work I referred to really just showed that there was conflict between the efficient use of resources over time and the availability of resources at later points in time. There was another figure to show the conflict between conservation and economic development. These conclusions might be arrived at by other means, but the author did compose equations and plot them out. If the Pareto thing is specifically about no-one (anywhere? anytime into the future?) being worse off (?) – then wouldn’t that mean efficiency is not Pareto Optimal at all?

“If that’s how he’s using Pareto Optimality then he’s monkeying it up and should be ostracized in public (public public, like the town square, not the internets).” Public squares are traditionally more for pillorying people, you might send someone to Coventry in a variety of places.

D. R Baker @42
“Although it can be argued that this position is true linguistically, the conception of utility functions that include macroscopic considerations such as overall income inequality are likely to make general equilibrium immediately incalculable. As opposed to usual utility functions that are based on bundles of goods and services, these utility functions would introduce serious feedback from the macro level to the micro level. I think that you may be seriously overestimating the power of economic analysis if you think that this conception of Pareto efficiency would not descend into chaotic results.”

If general equilibrium is incalculable wouldn’t that imply it shouldn’t be calculated seriously at all – maybe just for a hobby or an art project or something? – instead of used to make up models to advise governments and so forth as to what the likely future effects of various laws and policies might be?

In this sense, i.e. in the sense that economics is a tookit (Brad DeLong’s view) for local problems, I have no objections at all.

but then you’re arguing with strawpeople, and mainly strawpeople from the past. So you’re angry at Laffer, Feldstein and Friedman for their role in the Reagan revolution. Why not just say that. Today, though, the “toolkit” view is held by a vast majority of contemporary economists, especially those who are still actively publishing. Look at NBER working papers, a good reflection of what’s going on in the discipline. About 8 of 10 papers fit the “toolkit” view. People who do RCTs like Duflo (and I assume Chetty) are very much aware of issues about systemic effects and scaling up and such concerns are increasingly common in published papers.
I think that economists have way too much of a stranglehold on policy debates and I’d like to see much more input from other social sciences and history (and we’re seeing more of that – e.g. Hacker’s work on the politics of healthcare was probably just as influential as Gruber’s in the Obamacare debate). There is certainly a tendency among economists to think they don’t have to engage with related fields when writing on a topic (cf. Emily Oster, Steve Levitt) that’s quite unfortunate – and I think its causes in econ graduate education should be discussed and addressed. But if one is interested in doing that – and that’s been my point from the start – one has to make an attempt to actually talk about economics as it is practiced and not some caricature of it. Else you’ll never get economists – even the most sympathetic to your concerns – to listen.

It is ecologically insane because there is something like an “ecological genetics” which would describe how the condition of interacting with all the other relevant species in the ecosystem

From the viewpoint of the older sciences, it seems to me that “economics” is at least three disciplines: (1) what one might call scientific economics, that is, measurements, hypotheses, and theories that describe production, consumption, and so on; (2) what one might call economic engineering, which addresses what policies, business practices, financial practices, and so on might be undertaken to produce particular economic results; and (3) moral and economics, which undertakes the question of the values underlying economic engineering and personal conduct in the marketplace. These distinctions are seldom made in discussions of economics. Take, for instance, the idea of “efficient” markets. One goes from a set of hypotheses about market behavior which are at best approximations, to the practice of making markets more efficient, on the assumption that this is a moral good, and finally to the idea that greed is an ethical positive.

Take a knife, hack the three apart, and one can talk about market efficiency without ending up arguing for the commoditizing of everything, or even sliding over to Randism. Without the distinction, one ends up, well, with the libertarian economics that has done so much harm in the past 35 years.

Since you have attacked Greg Mankiw, it is only fair that we look at what the other side is doing as well. The Democrats are not contributing to making America a better place. Instead, they areplaying their own sick mind games trying to win brownie points for the bosses they are brown nosing.

If you have ever been to Berkeley, you will know what I am talking about. This commenter puts it well.

I lived in Berkeley for 4 years and Oakland so far for 5. Berkeley is CRAZY. What I mean is that you’d BETTER think and act a certain way- the liberal way- or else. I never lived around as many closed-minded people in my life and it was the reason I moved out.

Many Democrats are in a class of their own. Sit in a class by Robin Ely, and you will know what I mean. Before you go, you need to know that if everything (and by everything, I mean everything) you say is per the Democratic talking points, she will go — yeeees. Rather like a horse neighing. If you say somethng that is not according to the Democratic talking points, she will assail you.

The sickness and the disgusting “agonism” mentality of the Democrats is responsible for why Republicans (and many Demoncrats as well, I am sure) are not able to express the best ideas they may have but are instead left talking about general “Pareto optimality” concepts that will not offend anyone.

@109 Sean, I read your footnote and it is irrelevant (what do “local optimums” have to do with anything?)

@107 ZM, I also made a mistake in the above (see how easy it is to get confused?). In the example above 0:20 is always also a PO allocation.

The Pareto Criteria is not really about transferring money or goods or utility but about comparing different situations. Of course it is often framed in these terms because we wish to compare the effects of such transfers. If in situation A at least one person is better off than in situation B and no one else is worse of than situation X Pareto dominates Y. A Pareto optimal allocation is one which is not Pareto dominated by any other. There’s no complicated math here, just plain logic.

The Pareto criteria is one possible definition of inefficiency, a pretty weak one. It generally will involve a lot of non-comparable situations which can’t be ranked in terms of efficiency, and/or big sets of possible outcomes which are Pareto optimal.

For example, it’s often said that “monopolies are inefficient”. Not – at least not without possibility of side transfers – according to the Pareto criteria. Suppose your only regulatory instrument is the price. If you force the monopoly to charge a price different than the one it would normally choose (the monopoly price) you make it worse off. Since without regulation the monopolist is maximizing its profits, the monopoly outcome is in fact Pareto optimal. Of course the competitive outcome – which maximizes the sum of monopoly profits and consumer surplus is also Pareto optimal.

What people mean when they say “monopolies are inefficient” is that there’s dead weight loss, that the monopoly outcome does not maximize the sum of monopoly profits and consumer surplus. But that’s a different, stronger criteria of efficiency than Pareto. (They’ll coincide when there’s the possibility of side transfers in a addition to price regulation).

Another example. Suppose you tax the rich and give to the poor. There’s a leaky bucket in the sense that for every dollar taken from the rich the poor get only 80 cents. The zero taxes situation is pareto optimal and maximizes the amount of dollars in the economy (though not necessarily sum of utilities). But suppose you take a dollar from the rich person and give .8 to the poor person. In absence of interpersonal transfers, is the outcome Pareto optimal? Yup. The zero tax situation does not dominate the -1:+.8 situation because the poor would be worse off. So according to Pareto both the no tax case and any positive level of tax situation are both “efficient”. Even though there’s “waste” in the sense of a leaky bucket.

The number of people involved is not important per se but it may play a role in some social welfare theorems which try to aggregate individual preferences.

“How did AR come by 20 in the first place” – the Pareto criteria is not a criteria of fairness but of efficiency. In the same way that, say, the Gini index or variance of incomes is not a measure of fairness but of inequality. Heck, one of the standard properties of inequality and poverty measures is so called “Anonymity”. This explicitly rules out considerations of fairness (it doesn’t matter “who” the poor are, just how many of them are there and how poor they are).

This is as it should be. We’re defining efficiency (or inequality, or poverty) not fairness. So the concepts shouldn’t be mixed up. Of course just because you use one concept to evaluate social outcomes doesn’t mean you can’t additionally use another. In fact it’s as silly to say that the Pareto criteria is value-laden as it is to say that variance, or standard deviation, or the gini index are value-laden. They may be – probably are- *used* in value-ish ways, but that’s a different matter.

Some change is a pareto-improvement, if by the change, at least one person is made materially better off, without making anyone worse off. The Pareto criterion is that at least one person be made better off, without making anyone worse off.

Only a change can be pareto-optimal; it’s the difference that’s being evaluated, but a state of the world in which no pareto-improving change can be identified, could be said to be pareto-efficient, in the sense that no pareto-improvement can be identified as an option. This is an analogy to the general concept of efficiency, as value-maximizing, cost-minimizing use of resources, such that there is no waste. If a firm failed to take a costless opportunity to increase the value of output, its production could not be judged efficient. Just so, a society, which failed to take a costless opportunity to improve the lot of at least one person, could not be termed pareto-efficient.

Income distribution is under detailed dispute between interested parties. I want a raise. My boss wants to cut costs. It is commonly assumed that private, voluntary agreements to exchange are both mutually beneficial and pareto-efficient. Voluntary agreements to cooperate, by virtue of being voluntary, can be presumed to be mutually-beneficial, it is argued, and in forming such agreements, the parties to the agreement would not begrudge one another any gain, which was costless to the other party or parties. Thus, economists usually presume that the distributional situation (in the context of a market-exchange economy, in which most distributional issues have already been settled by private, voluntary agreements governing exchange) they are trying to improve is already one, which is mutually-beneficial, even though Pareto-optimality does not speak directly to mutual benefit.

By its own (dim) lights, Pareto-optimality is an epistemologically modest concept, skirting the issue of whether one person’s enjoyments are more or less intense or meritorious than another’s. There is no disputing, as the ancients said, taste. But, it is deeper than that, fitting to a general theme of conservative economists, that privileges the judgments of the market god over the judgments of more sentient beings. It doesn’t take a Derrida to deconstruct the agenda when a Mankiw titles his paper, “Defending the One Percent”.

“Pareto optimality” is the petard on which Obama is hoist. It is a concept worth exploring. And it is an important concept primarily for its political implications.

Bush was a dummy. That is why he failed. Obama is unable to convince people that his policies will not make anyone worse off. The lack of “Pareto optimality” is why he has failed as well. Take what Greg Mankiw has said as a critique, not a defense, and then you will find that what he says has a lot of value.

> In fact it’s as silly to say that the Pareto criteria is value-laden as it is to say
> that variance , or standard deviation, or the gini index are value-laden.
> They may be – probably are- *used* in
> value-ish ways, but that’s a different matter.
Yes, the concept of Pareto optimality itself is not value laden. The question is: what policies does a person who is talking about Pareto optimality advocate? One can only critique Greg Mankiw in this paper you cite, not the concept of Pareto optimality itself. Consider this: if Obama’s policies were indeed making a lot of people better off without making too many people worse off, wouldn’t those people be clamoring for him being considered a genuine success? Indeed, Obama’s policies are exactly not that – they are not Pareto optimal. This is why Mankiw’s critique is an important one.

Pseudonymous #103: “Lee’s point is pretty basic but he hasn’t seemed to figure it out yet–that not speaking out against something is tantamount to tacit endorsement. This is pretty ludicrous… It matters because you’re laying the blame at their feet, and not your own for electing politicians who are going to pursue their pet policies regardless of evidence, who are going to find someone with a credential to get behind them. That’s why it matters.”

This skirts close to requiring a response that would confirm Godwin’s Law. My basic point is the same as it was in my first comment above, which is that economists appear to hold, as you appear to do here, that preferences are exogenous, or else preferences are set experimentally as the rules of a laboratory game — but the public preferences for social policy have in fact been set by a specific ideology which has been propagated historically by economics itself, and this ideology is still the default, false belief of a majority of people — noneconomists — who have been taught that it is true. So there is a circularity here, initiated from within economics. That is my point. Because it isn’t “regardless of evidence,” as the Duhem-Quine underdetermination thesis amply indicates is a species of nonsense. (This would have been taught in your Economic Methodology 101, and both Mark Blaug and D. Wade Hands, to name two fine books in front of me, have written lovely little chapter sections on it.) Now, we could try to blame otolaryngologists for not setting the record straight, or else car mechanics, or musicians, or evolutionary biologists, or perhaps a plumber or two might try his hand, — but you know what? They aren’t actually studying this stuff, and we could well imagine that they, citing something vaguely like a principle of intellectual specialization and the gains from trade, might propose that the blame lies ELSEWHERE. So if economists are not interested in social responsibility in their chosen craft, fine that’s your right, but perhaps you might at least publish a list of all the names in your numbers who twist our society because want to get into the spotlight, or are willing to sell their credentials to politicians, and after that, the rest of the economists, surely studying nothing of much import, could get into a spaceship going to Mars?

Functionally more like the economic concept of general equilibrium? It makes me think that, considering the length of time for complete speciation (on the order of ten-thousand generations, for smaller animals?) as opposed to the rather short time for changes wrought by human creativity and innovation in a (modern) economy, it may be that the criterion of Pareto optimality is more aptly suited to wildlife ecology…

> Welcome to politics AJ.
I don’t know that your implication is, but to say that it is *merely* politics is to
ignore the patent anti-Semitism.

One line of reasoning in saying “Welcome to politics” is to say that because a person X is Jewish, he *should* be discriminated against – because of original sin or whatever other claptrap that Christians come up with – but that, I would argue, is not Just. That John Harvard was a Christian is probably one of the reasons why the world is suffering. Harvard can build churches to make themselves feel better about all they do and, at the same time, preach to the rest of the world how to behave. It is this dual nature of religion that makes it so popular.

notsneaky @113
Thank you for your response. I’ll think it over, but I find it rather confusing still.

Pareto (in translation) is actually better to read than I would have thought:

“Certain critics cry out apodictically against the new theories as being absurd because they attempt to state economic phenomena “in mathematical formula”. But no such pretentious attempt has been made. To try to state economic phenomena in the shape of mathematical formula would be very like the physicist trying to apply without modification his mathematical formula for the descent of falling bodies in a vacuum to the movement of a feather floating on the wind. These critics may therefore be told that, far from aiming to express complex phenomena in a simple formula, economists broadly avow that they do not know and will never know the theory of any complex phenomena in all it’s details.”

Trader Joe @ 75: The payments for SS continue to come out of the trust as they always have. Apart from the brief tax holiday during 2011-2012, no part of social security payouts have ever been made out of the general taxation of the U.S. economy.

I probably should just let this go, but . . .

Payments from the Trust have to be funded, as do all payments of interest and principal on all general obligation debt, from general taxation. The Trust Fund has accumulated pieces of paper that commit the government to fund the shortfall from general taxation. That’s the nature of the Trust Fund.

As a sidenote, the ability of Social Security to fund what are commonly called cost-of-living increases in the benefit depend on tying the FICA text to a flow, which receives a large share of productivity increases. Now that all improvements in productivity go to people, whose wages are above the FICA cap, that doesn’t work. Why is chained-CPI preferred as a reform to raising the cap?

As easy as it may seem to distinguish fairness from efficiency in the abstract, I don’t think it is such a cut-and-dried issue in practice. A claim that a patently unfair bargain is Pareto-efficient would be an offensive absurdity, as previous comments have pointed out. Pareto-efficiency only has a claim on our respectful attention to the extent that it applies to a bargain, which meets some minimal criteria for being mutually beneficial.

The efficiency of the bargain is, necessarily, a secondary issue to the fairness of the bargain, and fairness and efficiency can never be entirely separated. In my view, inefficiency would be solid evidence of unfairness, and unfairness, solid evidence of inefficiency. I don’t think this way of thinking differs much from common practice, though I think conservatives are often unaccountably and wilfully naive about the fairness of the “market economy”, in justifying a formal reliance on Paret0-efficiency or related notions, like Kaldor-Hicks, as a welfare criterion.

” a patently unfair bargain is Pareto-efficient would be an offensive absurdity” – only if you jump from “Pareto-efficient” to desirable. But the criteria itself makes no such implication. A patently unfair bargain that is Pareto efficient is Unfair and Pareto-Efficient. What’s the problem with saying that? Where is the offensive absurdity?

Pareto-efficiency only has a claim on our respectful attention to the extent that it applies to a bargain, which meets some minimal criteria for being mutually beneficial. No, the idea is to have a criteria which is more basic. You can, of course, add other stuff on top of it.

The implication of the Pareto criterion is that all exchanges must be voluntary, yielding a divying up of economic surpluses, else why would such exchanges at all occur? (Cough, cough). The further implication is that it could guarantee the optimal allocation of *investment*, in order to assure the optimalization of aggregate productive surpluses. There are plenty of reasons to think that such an analytic criterion doesn’t suffice to address the key issues. (For one thing, production and the constraints under which production systems and organizations operate aren’t reducible to exchange). And the “bargains” that are stuck, whether “fair” or not, whether “efficient” or not, are not well captured by a mathematics of “markets”, devoid of institutional structure.

Not “desirable” — defensible. The question is whether a public policy intervention should take place. By its nature, the desirability of any distribution is going to be disputed by interested parties as well, possibly, by disinterested philosophers. Pareto-efficiency is a threshold defense against a claim that a public policy intervention is generally desirable. There’s an allied claim that there’s no agreed basis for a state, acting in the public interest, to choose to harm one party, to benefit the other, or a third-party (as in the case of externalities). We can agree that a Pareto-improvement is generally desirable; on the rest, we have to remain agnostic between conflicting claims. An assertion of Pareto-efficiency is implicitly a claim that we are in that narrow territory, where there’s no clear principle for further arbitration of conflicting claims.

notsneaky: What’s the problem with saying that? Where is the offensive absurdity?

If justice requires one party, say, to be punished, asserting pareto-efficiency is either irrelevant or an unconscionable assertion that justice should not be done. Say a manufacturer of toothpaste is using antifreeze as a sweetener, because it is cheap; children are given the cheap, sweet toothpaste and get sick. Nobody says, but this is a Pareto-efficient bargain, and fining the manufacturer and compensating the children or their families would be Pareto-inefficient redistribution. It’s irrelevant. We’re not considering a case, where we narrow differences down, and arrive at a point of public indifference between the conflicting private claims of firm and consumer.

Now, you can say it is not efficient to use antifreeze as a sweetener in toothpaste, because of the cost of harm done to the consumer, and I would agree with you. I would claim that inefficient is often unfair, and unfair is inefficient; these concepts are not easily distinguished and opposed in practice.

notsneaky: it’s about evaluating allocations not bargains

Just plain efficiency evaluates allocation of resources. Pareto-efficiency privileges certain distributions of income, which result from some prior agreement to cooperate in exchange.

Commenting on my own comment, it is probably misleading to term a particular distribution in which one’s self is not an interested party, as “desirable”. The interested parties may have desires with regard to the distribution, but a philosophical rationale for favoring one distribution over another has to rest on some principle, I would think, other than simply desiring a particular distribution as a kind of abstract consumer good: “I’d like a liter of milk, a dozen eggs, and the GINI coefficient in the window, please.”

Yes, that’s more or less why I’ve taken to putting scare quotes around, “market economy”. Pareto-efficiency is just one element of an elaborate, almost ritual stylization, which economists apply to questions concerning the distribution of income, a central purpose of which is to deny the exercise of political power. Most economists know perfectly well income is a political choice, but that doesn’t slow the enactment of the ritual.

fining the manufacturer and compensating the children or their families would be Pareto-inefficient redistribution.

No, it would not be Pareto-inefficient. It would not Pareto-dominate not fining the manufacturer (since the manufacture is worse off). But that’s different. For it to be Pareto-inefficient the situation with the fine would have to be Pareto dominated by the situation without the fine. But the situation without the fine does not dominate the situation with the fine either (since the children are worse off). For the situation with the fine to be Pareto-inefficient it would require that both the manufacturer and the children are better off.

This is just another one in the long list of examples which misunderstand the criteria. And these examples are becoming more and more convoluted and complicated to hide this misunderstanding.

Reminder: there can be many Pareto optimal allocations, some of which will offend one’s sense of fairness and other’s which won’t. But that’s because it’s an efficiency criteria (a particular, and very weak one), not a fairness criteria.

The implication of the Pareto criterion is that all exchanges must be voluntary

The proper reasoning is:
If exchange is voluntary then it is a Pareto improvement.

You’re saying
If it is a Pareto improvement then it must’ve been arrived through voluntary exchange.

You’re denying your antecedent.

More specifically, whether an involuntary exchange can be Pareto improving depends on the “transfer technology” available to individuals vis a vis “the authorities” (whoever it is that can force involuntary exchanges).

Examples of potentially Pareto improving involuntary exchanges:

forcing people to sign up for health insurance.
deficit spending in a liquidity trap economy
provision of public goods via appropriate taxes
if individuals value equality, redistributing income with “involuntary” taxes

@135 – it’s pretty straightforward. If you take money from the manufacturer and give it to the children & their families the result is not pareto inefficient compared to the status quo ante. The children & families (and arguably society as a whole) are better off. The manufacturer is worse off. Pareto efficiency simply doesn’t tell you anything about which of the two states is preferable. This applies more generally: Pareto efficiency has nothing to say about the desirability of any redistributive policy compared to the status quo — neither for nor against it. In that context I also don’t understand why you think pareto favors certain income distributions. For a thought experiment, let’s assume we have a stable amount of available income, we have zero costs of redistribution and income is the only factor we’re interested in. In that hypothetical, every single income distribution – from “one person gets everything” to “everyone gets exactly the same” – is pareto efficient.

I find your writing on this incredibly hard to follow, but best I can tell your point is related to the rhetoric of pareto efficiency as used by hardcore pro-market people like Mankiw? In other words – are you actually arguing against the textbook concept of pareto efficiency, or are you arguing against how it is used in argumentative practice?

AJ @ 115, it seems to me your post suffers multiple instances of the fallacy of the excluded middle. It could be that Obama’s failure to convince that his policies won’t make people worse have has nothing to do with those policies; perhaps he’s just a poor convincer, or perhaps some people are unconvincable, or perhaps they’re stupid, or perhaps they don’t like the color of his skin, or perhaps some other people confuse the issue by lying about the effect of those policies.

From the OP: “It’s entirely plausible that an economic change that is Pareto-efficient in terms of desire-satisfaction is not Pareto-efficient in terms of a set of basic capabilities, or in terms of equivalised household income. So even if one doesn’t attach any value to distributional issues, our endorsement of the Pareto-criterion may be dependent on the “metric” in which it is expressed.”

Another variant on this may be what I’ll call the Elysium problem. Providing access to Med Bays for everyone would in fact lead to improvements in capabilities, health understood here as a metacapability necessary to carry out projects consonant with one’s values and life plans. Those luxuriating on the space station could now return to Earth to carry out projects safely, and the benefits for the sickly on earth are obvious.

But to the extent that the inhabitants of Elysium derive utility from their relatively superior health, the universalization of access to the Med-Bays would actually come as a cost to them, and could thus be ruled out due to it not being Pareto neutral, much less a Pareto improvement.

Confining the Med Bays to Elysium would thus be a Pareto optimal state if we choose utility, rather than capabilities, as our metric.

Great article. Nevertheless it left me with a mental confusion, and this comment tries to help me untangle myself by writing my thoughts.

I think economics is a knowledge arena, that try to measure and explain the effects of different actions in the value of the economy. And that in itself from my pint of view has no moral side. Nevertheless the policies based on ever developing economical theories, does have moral implications, since it implies a choice of alternatives with different expected outcomes, affecting people in different ways. As inequality itself, I think its is more a ethical matter than an economical one. I think as the following example, lets assume we do a cost benefit analysis of killing all persons with disabilities strong enough to prevent them to earn the cost of maintining them. Maybe from an purely economic point of view, the whole society will be better off, by eliminating those persons. Nevertheless I doubt anybody will endorse such views, and most people will bring forward humanitarian reasons.

That doesnt mean the economical analysis is wrong, but that the means to achieve the end of a more efficient economy are wrong.

I think that is absolutely the case. On an issue such as healthcare, science (including economics) won’t be able to predict long-term effects, because it’s an n-compartment system with too many connections to compute for a unique prediction, and too many instance of new emergence likely in the future, to change the equations. (Again, these are Eric Schliesser’s two reasons, in different guises). I think it is easier and truer to suppose that making people healthier is a simply a good idea, barring restrictions in planet earth’s resource availabilities, and leave it at that.

I can think of two economic reasons that Obamacare will improve everyone’s situation, right off the bat: 1) it will decrease U.S. worker costs and make U.S. businesses more competitive globally, thus increase U.S. GDP, and 2) it will monetize hidden demand in a big sector of the U.S. economy (i.e. make healthcare more available to people) and thus provide jobs and investment opportunities in that sector, and in ancillary sectors: construction, retailing, etc. — all to say, Obamacare will make a bigger pie.

I am saying that the ritual of formally invoking Pareto-efficiency does not do anything, but confuse us, and that’s by rhetorical design. If it were straightforward, we wouldn’t be on comment 136 and counting.

What does your thought experiment do?

. . . let’s assume we have a stable amount of available income, we have zero costs of redistribution and income is the only factor we’re interested in. In that hypothetical, every single income distribution – from “one person gets everything” to “everyone gets exactly the same” – is pareto efficient. So, the concept of pareto-efficiency is washed in the blood of the lamb. It is innocent. Purely technical. Now what? How does it help us? How is it useful? When is it useful? To whom is it useful? Why is Mankiw invoking it in his defense of the 1%?

I certainly do not think that just any distribution of income could be efficient. Does anyone? Could a pure socialism of unconditioned equality of result be efficient? Could slavery? So, what’s the point of ritually chanting that every single income distribution is pareto efficient?

I bring up the case of the tainted toothpaste, because it is realistic. I don’t see any sensible application for the concept of Pareto efficiency to the case of the toothpaste sweetened with antifreeze. I presume from your comments, that neither do you, nor does notsneaky.

Applying pareto-efficiency implies that you’ve already parsed away these other hairy cases, but they haven’t been parsed away at all. If the gains of the 1% are built on financial fraud and rent-seeking — and they are — then, we need to look at those problems, not the artificially narrowed class of cases where pareto-efficiency might be a useful concept.

If the general tenor of my comments has been confusing, it may be, because I haven’t chosen to scorn the airy fairy abstractions of the poster, Ingrid Robeyns. I loathe the way inequality is treated by the intellectual left as a shapeless abstraction far more than Mankiw’s deceits.

OK, if your point is that pareto efficiency is almost always useless in real-life situations and that its application to real-life scenarios (as Mankiw does) is an almost infallible marker of bad intentions I’m with you.

It seems to me that Pareto efficiency is a useless measure for public policy, at least as it is being discussed here. If redistribution of income via changes in tax policy can be described as Pareto-inefficient, not because it reduces the wealth of some people, but because it may reduce the rate of increase in wealth for those people – in other words, because the change might have some future consequence against which there is no controlled measure to compare – then any change could be described as Pareto-inefficient. All that’s necessary is to postulate some future loss by someone, no matter how remote or implausible it may be. All changes in public policy are therefore Pareto-inefficient.

Plenty of good criticisms, but Pareto ‘efficiency’ or ‘optimality’ is only one of a web of interlocking absurdities that between them constitute the edifice of n-c economics, and while it’s certainly useful to point out the ways in which the Pareto Principle provides, and depends on, collateral support from the other fictions of Neo-classical World, it ought also to be attacked directly, head on. Otherwise it’s far too easy for the n-c economists (NCEs) to indulge in their usual two-stepping antics.

Mention the fact that the Pareto-superiority relation provides ony a sparse and partial ordering of allocations of goods, and the NCE will condescendingly point out that everyone knows that, and no-one would use it as a way of deciding allocative questions. (Or if they’re Chris Auld, they’ll just airily accuse you of miscontruing this ‘jargon’ as soon as you mention ‘efficiency’, as here: http://scienceblogs.com/pharyngula/2013/08/15/the-economics-of-menstruation-and-the-short-sighted-reductionism-of-capitalism/). If you confront them with an example, they’re all the more likely to object. That’s because they are forced to examine this basic block of their whole system, and remind themselves of all the caveats and criticisms of the concept that they probably last encountered (in prophylactically weak form) in a couple of paragraphs of their Econ 101 textbook.

But all these issues are ignored most of the time, and only when the concept comes under direct attack is it necessary to rummage arond in the bottom drawer for those anodyne acknowledgements that it’s basically pretty useless. No doubt dotted around the place, specialists lurk in unprestigious departments, knocking out obscure papers from their unglamorous offices, examining the problems of the Pareto criterion in minute and timidly-worded detail. Some of those articles might even find their way into the bottom drawer for production on demand, just to show that all this is old news and economists are already aware of every criticism you might make. Aware of, that is, when paying attention, but unfortunately they can’t kick their paradigm, however degenerative a research programme it might have become (for Pareto criteria are implicated in the core of N-C econ, as discussed below). Instead you’ll just hear the usual rationalisations about how it would be too difficult to try and change approach,; that the standard model is a good place to ‘examine departures from'(!); that it may be flawed but the pitfalls can be avoided; that no-one has come up with anything better (or only obscure isolated cranks!); all the stuff observed by sociologists of science in the mid-late C20th.

All this Chris Auld stuff about ‘miscontruing jargon’ is of course dodgy as hell, for two reasons – first, and obviously, redeploying an existing word to convey a new, technical concept closely related to, but subtly and importantly varying from, the the original connotation is a dubious practice at best. If ‘efficient’ (implicitly, Pareto-efficient) outcomes aren’t really always (or even very often) efficient, then perhaps you might want to signal the fact that you don’t mean ‘efficient’ when you say ‘efficient’, perhaps by using a different term, for example. There is one, after all: ‘Pareto-efficient’ (or why not ‘P-efficient’). Use it.

Secondly, ‘efficient’ (and ‘optimal’) indicates something that can’t be improved on, so this invites (let’s be charitable here, purely for effect of course) misunderstanding: a careless person might forget what is written in those dusty bottom-drawer sheaves about how the Pareto-efficient outcome doesn’t really have much to recommend it over other, Pareto-incommensurable allocations. They might instead come to think that a Pareto-efficient allocation really is optimal (or for real sophisticates of upright gait, as optimal as a properly neutral, know-nothing approach can or should try to get). Even Axtell refers at one point to two equally efficient (i.e. Pareto-optimal) market mechanisms, as if there is really some sense in which these two are ‘equally’ efficient.

But the role of Pareto-efficiency, or -optimality, (or of Pareto-improvement) isn’t primarily to underwrite specific allocations of resources, for example those expected to arise from some particular policy ‘intervention’. The Kaldor-Hicks criterion has been bolted on to Pareto-improvement to save it from the most crashingly absurd of recommendations (or rather failures to recommend) in that kind of context. (This involves a sotto voce suspension of the usual know-nothing methodology so as to introduce a class of outcomes which can b considered ‘equivalent’ to some Pareto-efficient allocation.) Instead it plays a murkier role in the background. Mankiw’s defence of the 1% is pretty meretricious stuff (though such stuff, coming from top professionals, helps to drag Overton windows one way or – just conceivably, in theory – the other). But his appeal to a supposed mere Pareto-improvement isn’t that wacky in the context of the dominant ideology NCEs do so much to help sustain. When he says The Pareto-criterion is the clearest case: if we can make some people better off without making anyone worse off, who could possibly object?, he’s focussing rather too sharply for comfort but the point is a basic one underlying the defence of markets. In its aggressive form, we see it in allusions to the ‘politics of envy’. In the more earnest, though even more irritating, didactic mode, we’re instructed by the barter mythologisers that a trade is a positive-sum game and so both parties should be grateful, regardless of the relative gains each makes. (Corollary: especially the party in a weaker bargaining position, because they presumably don’t have to bear the same burden of opportunity cost as their saviour.) A game-theoretician, rater than an economist dabbling in game theory, wuld probably have something to ay about that – it’s very much down to how you draw the game up in the first place – but I won’t digress down that line for now.

And that’s really what underlies the use of Pareto criteria: the longstanding ‘market’ paradigm in economics. This is pervasive to the point of invisibility to the indoctrinated. CT’s own Dan Davies, for example, can write with a relatively straight face that the basic underlying question of economics as “How do we best organise the decision making process with regard to production, consumption, and exchange?”. Pareto efficiency was basically invented as a way of presenting market equilibria as in some way desirable, rather than simply vaguely salient (though not always unique or indeed possible), mathematically neat, or a mildly interesting curiosity. These equilibrium allocations – even in their ideal form involving a central planner – do not, after all, maximise utility, nor do they have any other particularly alluring characteristic, beyond ‘clearing markets’. So a special criterion – named after efficiency – was devised, to describe what it is that market-clearing actually achieves. This doesn’t have any independent specification – it’s not a quantity nor a complete ordering of allocations; not even, as pointed out, a unique outcome. It is specifically tailored to the concept of market clearing. In fact it fits that concept so tightly it might have been sprayed on. In effect, “Pareto efficiency” just describes a situation in which no pair of the rational maximisers involved wants to enter into any further trades (I won’t piddle around with edge cases – say, unilateral appropriation and depropriation – just now).

So the ‘efficiency’ of markets is little more than stipulation, thanks to Pareto. What do (complete, etc) markets do? Tend to equilibrium. Why is that something we should be interested in, even try to bring about? Because it is efficient. What do we mean by ‘efficiency’? The situation in which there’s nothing left for the market to do. Notice this bars a strong resemblance to the three or more other jargon terms which just happen to be homophones of the plain English word ‘efficient’: take the Strong EMH, for example – it says that no-one can beat the market, because ‘the market’ (in equilibrium, no doubt) already includes whatever move they make to try and beat it. Moronic? Yes, but you’ll find people willing to defend it on these very boards.

This is one of the ways in which typical neoclassical ‘micro’ models depend, as JQ has recently suggested, on the ‘macro’ GE model. The efficiency of equilibrium allocations is a recommendation (we want efficiency, so we must have more complete markets, futures in everything and every other derivative imaginable, etc) – and since as we know the equilibrium is the notional endpoint of an economy of market exchanges, and these can be thought of as Pareto-improving, those exchanges are to be favoured too, as the route to Optimisation. This favoured status means the network of potential bilateral exchanges becomes the substrate on which all economic analysis – including, most importantly, cost-benefit projections for policy proposals, must implicitly be based. This insane limitation sees its apotheosis in the 2nd Welfare Theorem, which makes Kaldor-Hicks look quite realistic by comparison.

The fact that Pareto-optimality is so irrelevant and useless (it’s not far off being a tautology in the way it’s often, with some justice, said that Survival of the fittest is – though since evolutionary biologists don’t normally make predictions or evaluative judgements on the basis of their theory, that is a strength for their theory – the same can’t be said for economists) is just one of many ways in which the markets v planning debate is routinely tilted in favour of markets – planners are supposed to subserve some objective function or other, while market designers can just rely on Pareto-efficiency. (Cosma Shalizi’s CT post on that issue did at least feature this aside: If it’s any consolation, allowing non-convexity messes up the markets-are-always-optimal theorems of neo-classical/bourgeois economics, too. (This illustrates Stiglitz’s contention that if the neo-classicals were right about how capitalism works, Kantorovich-style socialism would have been perfectly viable.) Markets with non-convex production are apt to see things like monopolies, or at least monopolistic competition, path dependence, and, actual profits and power. I think there’s a paper by Wong 1999 which also finds that GE is basically incomputable.

But of course the magic of the market, and the decentralised ‘price signalling’ between price-takers was supposed, in some hazy way, to remove the need for any calculation. As far as I can make out though, the mechanism whereby real ‘markets’ actually approach the prized Pareto-optimality wasn’t really inspected in detail until very recently, after about a century of general equilibrium analysis. In the 70s, it was found that only one extra assumption – a relatively innocuous one, which isn’t saying much – on top of the usual mad fantasies was needed to show – by deriving suitable equations – that bilateral market exchanges would tend to a Pareto-efficient allocation. More recently, Axtell published The Complexity of Exchange’ (link above), which actually tried to model a decentralised market process; still aiming, of course only at the specially-designed objective of Pareto-optimality. Axtell was very diplomatic, even euphemistic, in his wording, but the results speak for themselves:

[sic. – must be a draft]Walrasian markets in their Arrow-Debreu conception are an ideal type, in the terminology of the philosophy of science, a caricature of reality that abstracts from many details of real markets in order to provide a home for our intuitions and a point of departure for deeper exploration of market processes. Unfortunately, the embodiment of this ideal type in CGE software, especially when utilized for policy purposes, institutionalizes a series of propositions that more behaviorally realistic and decentralized models reveal to be false, namely, that markets don’t disperse [i.e. transfer] wealth, yield allocations that are determined solely by preferences and endowments and are not history-dependent, and . Luckily, the unreality of this ideal type is given away by it computational intractability. In the end we advocate not the jettisoning of this useful abstraction, but merely its circumspect use whenever focused on questions for which it has limited ability to adjudicate an appropriate answer, e.g., distributional issues, actual prices. But because policy-focused model deal always and everywhere with just these issues, a direct consequence of the results described above is to at least cast a pale on the utility of such analyses, if not to vitiate them altogether.

The whole project of GE analysis is a degenerative research project, a paradigm waiting to be superseded. Pareto-opimality, which was designed to prop up that project, serves no legitimate purpose.

> Oh I see, you are a kook. Carry on.
There is at least one or two people who know what my real identify is. So it was important for me to add that last bit.

I haven’t made up my mind about you yet, but then you have said almost nothing so far in this discussion. If you have an actual opinion on the topic, please go ahead. Now would be a good time. I will patiently wait for you to actually say something non-trivial. So, please back to the discussion as opposed to back to attacking me. This approach saves you the bother. This approach saves me both the time and the bother.

> It could be that Obama’s failure to convince that his policies won’t make
> people worse have has nothing to do with those policies; perhaps he’s just a
> poor convincer, or perhaps some people are unconvincable, or perhaps they’re stupid,
> or perhaps they don’t like the color of his skin, or perhaps some other people confuse
> the issue by lying about the effect of those policies.

@Layman – Very fair point. That is perfectly correct, of course.

There are two solutions : one, say that there is only so much we can do if we want to be Pareto optimal (Republican) or two, admit that we have reached the point where the Great Stagnation has been going on for long enough that there is no way to be truly Pareto-optimal in terms of policy and so we should do something about the stagnation by means of redistribution (Democrat).

The key problem, imho, is that, other than toy examples, the concept of Pareto optimality may not have any real-world meaning. In America, both parties have broad agendas. So when you buy into the Republican platform, you also buy into an aggressive foreign policy (which may not be Pareto optimal for all concerned), and when you buy into the Democratic platform, you also buy into a redistributionist agenda.

> I encounter economists (scholars or students) who fail to see why endorsing Pareto
> efficiency is not value-neutral,

“The key problem, imho, is that, other than toy examples, the concept of Pareto optimality may not have any real-world meaning. In America, both parties have broad agendas.” Sorry to quote myself, but the problem is what I have above. Again, I believe that stating that the concept of Pareto optimality is value laden is incorrect (pace Ingrid Robeyns). It is indeed value neutral.

There are many examples where policy outcomes could be made better by using the Pareto criterion (modulo small number of people being affected). Example 1 – we simply didn’t build the bridge to nowhere. Example 2 (this is not intended to be politically correct) – we made a law that first ladies such as Michelle Obama should simply stop spending so much of the tax payer money and instead the money be used to feed hungry children in America. Now if we could pull that off, *that*, with due respect, would indeed be Pareto optimal. That would be downright awesome.

> I encounter economists (scholars or students) who fail to see why endorsing Pareto
> efficiency is not value-neutral,
….
Again, I believe that stating that the concept of Pareto optimality is value laden is incorrect (pace Ingrid Robeyns). It is indeed value neutral.”

Hmmm, I think Pareto’s writing is probably the biggest argument against your argument, he pretty obviously was involved in a normative/political project, however im/explicit he was about it:

“It could be argued that all these theoretical considerations do not achieve much in actual terms. and it is true that as it is not only through their ignorance of the teachings of ethics that evil-doers appropriate other people’s property, similarly, it is not only through their ignorance of the truths of the science of economics that politicians are led to act in the wrong way.
It is manifest that with this kind of people there is no logic that works: neither mathematical, nor any other logic man could ever find; the language they understand is of an entirely different nature. But they take advantage of the ignorance of the public, and getting rid of this is the best way, and perhaps the only way, as Molinari says, to destroy their power.”

FN “Gustave de Molinari – a Belgian-born economist associated with the French economistes, a group of laissez-faire liberals …. Pareto said he considered himself a disciple of Molinari”

> Hmmm, I think Pareto’s writing is probably the biggest argument against
> your argument
I don’t agree. In decision analytical terms, the real problem is one of distinctions. The distinction between what is and what is not Pareto optimality, while I believe is well understood in the field of economics, is now being redefined in a new way by you.

In order to finesse that objection, let us define a new concept. Let us define the concept of AJ-Pareto optimality using decision analytical constructs. (This is a concept originally proposed by Pareto but now refined by the noted strategic thinker AJ. LOL.) An outcome of a decision is AJ-Pareto optimal if some people are made better off and nobody is worse off. (The distinction between Pareto optimality and AJ-Pareto optimality is that there is no reference whatsoever to anything else that I may say now or in the future about economics, philosophy or any other subject that will alter this definition of Pareto optimality. Again, nothing that I may have said in the past or will say in the future has any bearing on how I have defined AJ-Pareto optimality).

Given this concept of AJ-Pareto optimality, it is clear that some decisions are AJ-Pareto optimal and some other decisions are not AJ-Pareto optimal. My contention is that the decisions that I described above are not AJ-Pareto optimal (modulo the dissatisfaction of a very small number of people or a very minor level of dissatisfaction). Furthermore, it is also clear that this *is* a useful distinction.
– many decisions can be shown to be non-AJ-Pareto optimal. e.g. dropping a set of nuclear bombs over the Pacific Ocean resulting in a global nuclear winter.
– many decisions are AJ-Pareto optimal e.g. planting rice in a paddy in South India and harvesting it.

-+-

One question for Ingrid Robeyns – given this post and discussion: how much confidence do you ascribe to your statement that the concept of Pareto optimality has values inherent in it? This would involve picking a number from 0% to 100%. Are you really a hundred percent confident making this assertion?